Intro

1. Money:
   • Store of value
   • Medium of exchange
   • Unit of account
2. Finance is a study of investments (for this class)
3. 'Portfolio Selection' paper from 1952 (risk and return introduced)
4. Purpose of Financial Markets:
   • Setting Prices - what people are thinking an asset is worth
   • Transferring Risk - insurance?
5. Assumptions:
   • Agents are selfish
   • Investors prefer more to less
   • Investors don't like risk (prefer less uncertainty)
   • Investors prefer money now to money later
   • No such thing as a free lunch (no such thing as something out of nothing) Arbitrage
   • Financial Markets shift (S == D)
   • Risk sharing and Frictions are central to Financial Innovation
   • Every model is unrealistic (because if its assumptions)
6. Fixed income:
   • Debt instruments (bonds) ways to borrow and lend money
   • Fixed Cash flow
   • Cash flows are the purchase, coupons and principal
   • Bonds (Government):
     • Treasury Bills (<1 year), Notes (1-10 years) and Bonds (>10 years)
     • Semi-Annual Payments
     • Safe/Risk-Free Assets
   • Corporates (Corporate bonds):
     • Corporate Paper (<1 year), Bonds (>1 year)
     • Different payment priorities (Who gets paid first)
     • Higher yields (higher risk)
     • Different types of risk: credit, liquidity, counter-party
   • Longer bonds tend to have a higher interest yield
   • When the yield curve flips, the recession is coming (".com" bubble, 2008 crisis)
7. Equity:
   • Ownership of the future cash flows in the project (company)
   • No maturity (no expiration date)
   • Cash flows are stochastic (memoryless, as in - you own a percentage of the profits)
   • Cash flows are subordinate to debts
8. Equity Indices:
   • Its an indicator of how well the market is doing
   • Looking at a sub-sample of companies in a market
9. Derivatives Contracts:
   • Futures - Contracts signed today to deliver something in the future
   • Swaps - Exchange two sets of cash flows for a specified amount of time
   • Convertibles - Debt contracts that convert into equity in certain circumstances
   • Options - Contracts that give one party the right to buy or sell a certain security
   • Asset Backed Securities:
     • Securitized products
     • Cash flows are a function of underlying (mortgages, car loans, life insurance)
10. Types of Markets:
    • Exchange Markets - Third party that guarantees the contract
    • OTC Markets - no third party, there is just a buyer and the seller
11. Cost of Trade:
    • Brokers Commission
    • Bid-Ask Spread
    • Price impact (price moved by a transaction)
    • Taxes
12. Types of Transactions:
    • Cash funded (Rare - Cost of borrowing is low, while the reward is higher)
    • Margin funded (Bull) -- Borrow the money -- Going long:
      • Initial margin must be at least 50%
      • Maintenance margin must be at least 30%
      • Margin is defined as Equity / Value of Security
    • Going short (Bear) -- Borrow the asset -- Going short

Time value of money

1. Asset is a sequence of cashflows (essentially)
2. Future value is not the same as current value
3. The difference in future value and current value is called the yield
4. FV = PV(1 + R)^T
   • FV - Future Value
   • PV - Present Value
   • R - Rate of change for a time period
   • T - Number of time periods
5. All cashflows can be converted to a common exchange point:
   • How much is a £ in a year worth today?
   • How much is a £ today worth in a year?
6. Discount Factor:
   • How much £1 in the future is worth today
   • The higher the yield, the lower is the discount factor
7. Discount Bond (Zero Coupon Bond):
   • Issued in primary markets
   • Single payoff at the bond expiration date
8. Complicated Asset:
   • Multiple payoffs at time intervals in the future
   • PV and FV are the sums of all PVs and FVs in the future (adjusted for compound interest)

9.

FFM: Game Strategy

1.