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International Finance

International Finance. Tuesday 9 June 2009. International Finance: Today, 9.6.09. Lecture: 9:00 to 10:50 Break: 10:50 to 11:00 Lecture: 11:00 to 12:00 Break: 12:00 to 1:00 Lecture 1:00 to 3:00. International Finance: Tomorrow, 10.6.09. Lecture: 9:00 to 10:50 Break: 10:50 to 11:00

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International Finance

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  1. International Finance Tuesday 9 June 2009

  2. International Finance: Today, 9.6.09 Lecture: 9:00 to 10:50 Break: 10:50 to 11:00 Lecture: 11:00 to 12:00 Break: 12:00 to 1:00 Lecture 1:00 to 3:00

  3. International Finance: Tomorrow, 10.6.09 Lecture: 9:00 to 10:50 Break: 10:50 to 11:00 Lecture: 11:00 to 12:00 Break: 12:00 to 1:00 Lecture 1:00 to 3:00

  4. International Finance: Thursday, 10.6.09 Lecture: 9:00 to 10:50 Break: 10:50 to 11:00 Lecture: 11:00 to 12:00 Break: 12:00 to 1:00 Lecture 1:00 to 3:00

  5. International Finance Review Simon Johnson, Sovereign Wealth Funds Sovereign Wealth Fund Institute Charts, Evidence and response (end yesterday) Charts, design flaws FedEx example of Excel flaws, fedex.com, ARpts, 98 What is primary cause of current crisis Which country has “largest” economic response Stiglitz, greatest externality

  6. International Finance Review If you believe in Efficient Markets how should you invest?

  7. International Finance Simon Johnson, May, 2009, Atlantic, The Quiet Coup

  8. International Finance Simon Johnson, May, 2009, Atlantic, The Quiet Coup

  9. International Finance Finance joke John Paul Getty: If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem.

  10. International Finance Research Topic For guidelines see pdf file, web site, Guideline 5 Pdf file for papers with research data but still has many important ideas. Follows McCloskey

  11. International Finance McCloskey

  12. International Finance Lehman Brothers, Barclays, Excel Error http://www.itworld.com/business/56161/excel-error-gives-barclays-more-lehman-assets-it-wanted

  13. International Finance Khan Academy Many videos Many topics Finance Math Physics http://www.khanacademy.org/

  14. International Finance Timeline Federal Reserve Bank of St Louis http://timeline.stlouisfed.org/index.cfm?p=timeline

  15. International Finance Video Charlie Rose Show Three Economists, Princeton Wei Xiong, Markus Brunnermeier and Harrison Hong 14 August 2008 http://www.charlierose.com/view/interview/9221

  16. International Finance Arbitrage

  17. International Finance Arbitrage Same or equivalent goods (financial assets), Sold in different markets At different prices Buy in market where price is low And sell in market where price is high

  18. International Finance Financial Derivatives Forward contracts and futures contracts Options Calls Puts Swaps

  19. International Finance Financial Derivatives Where traded Exchanges Over the counter On exchange have clearing corporation On exchange have mark to market

  20. International Finance Forward and Futures Contracts

  21. International Finance Forward and Futures Contracts If actual futures greater than mathematical relationship.

  22. International Finance Calls, Black Scholes S = stock price, K = Exercise price, T = maturity date, t = current date, r = risk free rate, s = standard deviation

  23. International Finance Calls, Arbitrage Close to expiration Stock price is 50 Exercise price is 45 Call option price is 4.5 You have no position, how to make money.

  24. International Finance Calls, Arbitrage Close to expiration Stock price is 50 Exercise price is 45 Call option price is 4.5 You have no position, how to make money Buy Call, - 4.5 Exercise Call, - 45 Have one share (cost is 49.5), sell in market, + 50 Net gain is 0.5 (+ 50 – 49.5)

  25. International Finance CDS, credit derivative swaps Insurance against a default Like a put contract Example of payoff, default on debt Biggest issuer, AIG Notional value in trillions Issues: Writer receives cash inflow now, future cash outflow unknown Impact on Bankruptcy

  26. International Finance CDS, credit derivative swaps The buyer of these contracts pays a periodic fixed fee in exchange for a contingent payment in the event of credit default. Estimates of the gross notional amount of outstanding credit default swaps in 2007 range from $45 trillion to $62 trillion. Source: Deciphering the Liquidity and Credit Crunch 2007–2008, Markus K. Brunnermeier

  27. International Finance Video Princeton University Hyun Shin Markus Brunnermeier and Harrison Hong Paul Krugman Alan Blinder 23 September 2008 http://www.youtube.com/watch?v=Wj_JNwNbETA

  28. International Finance Variance or Standard deviation Correlation/Covariance

  29. International Finance VaR, Value at Risk In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.

  30. International Finance CoVar (Tobias Adrian and Markus K. Brunnermeier) We define CoVaR as the value at risk (VaR) of financial institutions conditional on other institutions being in distress. The increase of CoVaR relative to VaR measures spillover risk among institutions. We estimate CoVaR using quantile regressions and document significant CoVaR increases among financial institutions. We identify six risk factors that allow institutions to offload tail risk and show that such hedging reduces the wedge between CoVaR and VaR. We argue that financial institutions should report CoVaR in addition to VaR, and we draw implications for risk management, regulation, and systemic risk. We define co-expected shortfall as a sum of CoVaRs. http://www.newyorkfed.org/research/staff_reports/sr348.html

  31. International Finance Repo (Repurchase Agreement) A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a cash transaction combined with a forward contract.

  32. International Finance Repo (Repurchase Agreement, continued) The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is the interest on the loan while the settlement date of the forward contract is the maturity date of the loan. http://en.wikipedia.org/wiki/Repurchase_agreement

  33. International Finance TED Spread The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt ("T-bills"). TED spread is calculated as the difference between the three-month T-bill interest rate and three-month LIBOR. The TED spread is an indicator of perceived credit risk in the general economy. http://en.wikipedia.org/wiki/TED_spread

  34. International Finance

  35. International Finance Video Bear Sterns and Financial & Economic Crisis William Cohan Kate Kelly 28 May 2009 http://www.charlierose.com/view/interview/10338

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