[FAA 111.10] Lectures 1-2

Shareholder wealth maximization

Primary financial goal and is reflected in maximizing stock price

Present value of expected future cash flows

Ultimate measure of wealth

Market

Connects buyers and sellers

Market

Does not need to own inventory; can trade diverse goods

Timely and accurate info, liquidity, price continuity, depth, low transaction costs, and quick price adjustment to news

Characteristics of a good market

Financial Intermediation

Capital flows from savers (suppliers) to borrowers (users)

Financial Intermediation

Financial markets ensure efficient capital allocation

Primary Markets

New securities (e.g., IPO,s bonds) sold to public

Secondary Markets

Investors trade existing securities; provides liquidity and price discovery

Money Market

Short-term, liquid investments; low-cost funds for working capital

Capital Market

Stocks and bonds for long-term financing

Foreign Exchange

Currency trading; exchange rate determination; hedging FX risks

Derivatives Market

Exchange and OTC instruments (options, futures, swaps) for hedging/speculation

Spot Market

Immediate delivery (T+1/T+2)

Forward/Futures Market

Prices agreed today for future delivery

Derivatives

Value derived from an underlying asset; used for hedging or speculation

Call option

Right (not obligation) to buy at strike price; bullish

Put option

Right (not obligation) to sell at strike price; bearish

Efficient Market Hypothesis

Asserts that asset prices fully reflect all available information

Efficient Market Hypothesis

Implies it is impossible to consistently “beat the market” through stock picking or market timing, since prices already incorporate information

Weak-form

Prices reflect all past trading data (technical analysis cannot consistently outperform)

Semi-strong form

Prices adjust quickly to all publicly available information (fundamental analysis cannot consistently outperform)

Strong form

Prices reflect all information, public and private (even insider info is already reflected)

Random Walk Theory

Stock price changes are random and unpredictable, following no discernable pattern

Random Walk Theory

Prices move as new, unexpected information arrives — hence, yesterday’s price movement gives no reliable clue to tomorrow’s

US Real Estate Bubble

Easy credit & subprime mortgages led to rapid home price inflation

US Real Estate Bubble

Securitization spread risky loans globallu

US Real Estate Bubble

Collapse triggered massive defaults, hurting banks and sparking the 2008 global financial crisis

DTI

Sole proprietorships

SEC

Corporations/partnerships, securities regulation

CDA

Cooperatives

BIR

Tax registration, TIN, invoicing, record-keeping

LGUs

Mayor’s permit, zoning, barangay clearance

SSS, PhilHealth, Pag-IBIG

Employer obligations

BSP, PSE, PDEx

For financial institutions and market trading