Finance and Investment
An Introduction to Financial Environment
Maryam Mirzaei
Assistant Professor
German University of Technology
Spring 2021
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 1 / 24
Outline
1 What is Finance?
2 Six Principles of Finance
3 Financial Environment
Financial Markets
Hedge Funds
4 Financial Markets, Institutions, Suppliers and Users
Factors Influencing the Value of the Firm
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 2 / 24
Before we begin:
Test your financial fluency:
https://docs.google.com/forms/d/13xnp_
Hu4jWRHobLN7HzPoQJblK9LmGwKWFqX1EtyzCU/edit
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 3 / 24
What is Finance?
FINANCE:
o MONEY
o BANKING
o LEVERAGE
o CREDIT
o INVESTMENT
o CAPITAL MARKETS
o STOCK MARKETS
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 4 / 24
What is Finance?
Mathematics + $$$ = Finance
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 5 / 24
Finance and Its Relation to Other Fields
Finance is…
Ianalytical, using statistical, probability, and mathematics to solve
problems.
Ibased on economic principles.
Ithe study of how to raise money and invest it productively.
| FINANCE | ECONOMICS |
AssignmentTutorOnline
STATISTICS
MATHEMATICS
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 6 / 24
Six Principles of Finance
| i ii |
Money has a time value. All agents act to further their own self-interest oManager and stockholder interests may differ. Higher returns are expected for taking on more risk. Diversification of investments can reduce risk. Financial markets are efficient in pricing securities. Individuals : |
| iii iv v vi |
oPrefer more money to less;
oPrefer money now to later;
oPrefer to avoid risk (risk aversion).
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 7 / 24
Critical Challenges of Finance
Two main functions of all business activities:
•Valuation of assets
•Management of assets
Valuation is the starting point for management.
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 8 / 24
Time and Risk
Two Other Factors That Make Finance Challenging:
TIME
• Cash flows now are different from cash flows later.
• Time flows in only one direction.
RISK
• Under perfect certainty, finance theory is complete.
• Risk creates significant challenges.
• How should we model the uncertainty?
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial EnvironmentSpring 2021 9 / 24
Cash { the lifeblood of the business
Central to the whole of finance is the generation and management of cash.
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 10 / 24
Financial Markets
Financial Market: Any mechanism for trading financial assets or securities.
Money Market:
Channels wholesale funds, usually for less than one year, from lender
to borrower
Securities or Capital Market:
Deals with long-date securities such as shares and loan stocks
Foreign Exchange Market:
A market for buying and selling one currency against another
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 11 / 24
Class Activity
There are different free sources available to collect data about financial
markets. Some of these website are the followings:
https://finance.yahoo.com/
https://www.forex.com/en/
Check the above websites by clicking on the provided links. Navigate
the websites and discuss with your group members what you have
found?
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 12 / 24
Hedge Funds
A hedge fund is a fund used by wealthy individuals and institutions. They
are exempt from many of the rules and regulations governing other
institutions, which allows them to accomplish aggressive investing
strategies that are unavailable to others.
• Arbitrage: simultaneous buying and selling of a financial instrument in different markets to profit from differences in prices.
• Short-selling: selling a security one does not own with the expectation of buying it in the future at a lower cost.
• Leverage: borrowing money for investment purposes.
• Hedging: using derivative instruments to offset potential losses on
the underlying security.
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Financial Markets
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 14 / 24
Financial Markets
Capital markets function in two ways:
Primary market:
original sale of securities by government & corporation.
A market where the firm sells its securities to public for the first time
{ e.g., public offerings { selling securities to general public.
Secondary Market:
securities are bought and sold after original sale.
A market in which the securities issued by firms are traded.
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 15 / 24
Other Financial Markets
Auction market:
has a physical location { to do matching for buyer & seller.
Dealer market (Over-the-counter (OTC) market):
securities are traded over the counter. { nowadays, many dealers are
connected electronically.
Listed stocks:
traded on an organized exchange (eg: stock market).
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 16 / 24
How businesses finance their operations?
Financial institutions (e.g. pension funds, insurance companies, banks,
building societies, unit trusts and specialist investment institutions) act as
financial intermediaries, collecting funds from savers to lend to their
corporate and other customers through the money and capital markets, or
directly through loans, leasing and other forms of financing.
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 17 / 24
Financial markets, institutions, suppliers and users
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Financial intermediaries perform the following functions:
BRisk reduction:
Through a well-diversified investment portfolios;
BLiquidity transformation:
Short term savers and long term borrowers
BCost reduction:
Minimizing transaction costs;
BFinancial advice:
providing advisory and other services for both lender and borrower.
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The finance function in a large organization
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Factors influencing the value of the firm
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Class Activity
Read the following questions and discuss your answers in groups of 5
members.
What are financial intermediaries and what economic services
do they perform?
Search for the active financial intermediaries in Oman. what
economic services do they perform?
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Self-Study Questions
i What are financial intermediaries and what economic services do they
perform?
ii The past ten years have seen a much greater emphasis on
investor-related goals, such as earnings per share and shareholder
wealth. Why do you think this has arisen?
iii What are the financial manager’s primary tasks?
Maryam Mirzaei Assistant Professor (German University of Technology) Finance and Investment An Introduction to Financial Environment Spring 2021 23 / 24
References
| i | Pike & Neale, Corporate Finance and Investment Decisions and Strategies 9th edition. Brealey, Myers, & Allen, Principles of Corporate Finance. |
| ii |
USEFUL WEBSITES:
D Financial Times: www.FT.com
D Guardian: www.guardian.co.uk/money
D The Economist: www.economist.com
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