Capital Markets

Dr. Pedro Saffi

SKKU International Summer Semester (ISS) 2017

Session 1 - Introduction to Financial Markets

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About Me

I Lecturer in Finance, Judge Business School, Cambridge.

Teach MBA, Mfin, Mphil, PhD, and ExecEd students
Brazil, Egypt, Germany, Iceland, India, South Africa, Spain.

I Education
PhD in Finance, London Business School
Undergrad and MSc in Rio de Janeiro, Brazil.

I Academic Research: Equity Lending, Short Selling and Liquidity.

I Consulting: Asset Mngt. companies, real estate, pharma, and

UNs Permanent Court of Arbitration.

I Website: www.pedrosaffi.com / Twitter: @pedrosaffi

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 Course Basics Objectives

What is the point of Finance?

I Big Questions
How does Finance affect my life?
How do corporations, investment banks, consulting firms and
academics think?
What is its jargon? (e.g. Bonds, Derivatives, and other terms)

I Objectives
Basic Foundations: Main Instruments & Pricing.
Financial Knowledge: Interpret events in the news.
Links between the economy and financial markets.

GOAL: Understand how markets work and securities are priced.

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 Course Basics Methodology / Requirements / Readings

This Course

I Methodology
Always start with daily FT / WSJ discussion.
Cold-calling will be used. Be prepared!

I Dont Forget
Dont be afraid of mathematics.
Get used to working with quantitative data.
When in doubt ask! Your questions help other colleagues.

I Suggested Readings
Suggested book: Investments, by Bodie, Kane & Marcus.
My blog: http://psaffi.blogspot.com

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 Financial Markets Banks, Borrowers and Savers

Basic Overview
Banks connect providers of capital with those that need capital
Ultimately, they match savers to borrowers.

Who are the typical borrowers?

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 Financial Markets Functional vs. Institutional Perspective

Two Ways to Analyze Markets

I Functional: What Are Markets Useful For?

Markets enable allocation and deployment of capital.
Agents must deal with uncertainty.

I Institutional: Who Are the Main Participants?

Intermediaries, instruments, clients, etc.
Different regulations, perceptions, etc.

I Institutional structure determined by functional needs.

I Badly designed institutions can pervert the usefulness of markets.

Transparency is crucial to ensure a level playing field.
Different regulations, perceptions, etc.

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 Financial Markets Functional Perspective

What Are Markets Useful For?

I Allocate Money: Across time (student loans, mortgages) and
space (international investments).

I Reduce Transaction Costs: Money, ATM cards, Ebay, Paypal.

I Resource Pooling: Enable large-scale investments. Separation

of ownership and management.

I Information Revelation: Price changes reveal information about

the future. (Really?)

I Creating Proper Incentives: Try to ensure that people work as

they should (e.g. CEO compensation, bonuses)

I Risk Management: Enable repackaging and transfer of risk

(e.g. insurance companies, hedging against storms, etc.).

I Did markets fulfill all these roles well during the crisis?
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 Financial Markets Functional Perspective

Financial Services

Transaction and Payment Transaction and information services

Securities trading and research
Services Reduction of transaction costs

Delegated monitoring on behalf of households

Monitoring Pooling and investment of funds
Economies of scale in managing information

Purchase of financial claims from corporations

Asset Transformation Sale of financial claims to households

Risk Management and Facilitate the allocation of risk

Help clients with maturity mismatches
Maturity Intermediation Economies of scale in managing information

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 Financial Markets Institutional Perspective

Key Terms and Actors to Remember

I Markets: Equity, Debt, Derivatives, Commodities, Real Estate.

I Intermediaries: Banks, Insurance companies, Pension funds,

I-Banks, Venture Capital, PE, Asset Management, etc.

I Governmental (and quasi-) Organizations: Central Banks (e.g.

Fed and ECB), IMF, World Bank, BIS, SEC, FSA, CMNV, etc.

I Infrastructure and Regulation: Trading rules, accounting

systems, capital requirements, contract enforcement, etc.

I Trading Places: Exchanges (NYSE, LSE, LIFFE), OTC markets,

ECNs (INET, Archipelago, Market XT).

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 Investment Banks Activities

What Do They Do?

I I-Banks are an umbrella term for providers of:

Underwriting, selling, and trading securities.
Financial advisory (M&A, capital structure, reorganizations).
Asset Management.
Tax Management.

I Main centers: New York, London & Hong Kong.

Bulge Bracket: JP Morgan, Barclays, GS, Citi, Deutsche, MS,
UBS, Credit Suisse, BoA.
Boutiques: Lazard, Greenhill, Evercore, etc.
Some concentrate on specific regions, industries, or products.

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 Investment Banks Global Rankings
ment banking overview
Global Investment Banks

Source: ValueWalk
http://www.valuewalk.com/2016/01/investment-banking-2015/

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 Investment Banks Divisions

What Do They Do?

I Main Divisions:
IB: Corporate Finance, M&A, Structured Finance, Restructuring.
Markets: Equity, FOREX, Fixed Income, Commodities.
Research: Equity, Macro, Fixed Income, etc.
Asset Mngt.: Trader, Portfolio Manager, Analysts.
Others: HR, Tax Management, Compliance, Back-office.

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 Finding Financial Information

Finding Financial Information

Websites to obtain financial information:

1 Financial Data
markets.ft.com/research/Markets/Overview
markets.wsj.com/
www.google.co.uk/finance
2 Economic Indicators Calendars
biz.yahoo.com/c/e.html

www.newyorkfed.org/research/national_economy/
nationalecon_cal.html

www.bloomberg.com/markets/economic-calendar/

www.fxstreet.com/fundamental/economic-calendar/

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 Question for Discussion

Rearranging or Creating Wealth?

Discuss:
Critics argue that resources used for rearranging wealth (i.e. many of
todays financial innovations) might be better spent on creating wealth
(i.e. creating real assets). Is this a fair critique? Are there any benefits
to society from creating an array of new financial products?

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