Introduction to Finance
I. Setting the stage
Jaap Spronk
Institutions:
• special roles of
Markets:
government • Virtual
• special role of central bank (majority)
• international organisation • Physical
• supervisory bodies
• data & information
business
Money
Information
Processes Networks
Money
Information
• “Finance is”
• Valuation
• Risk management
• Optimization Decision-Making
3. Intro
We will concentrate on one type of player: The Firm
So we will concentrate on the two types of allocation decisions faced by the
firm (see slide #5)
Why?
“time is money”
interest rate
risk premium
But claims on future, uncertain cash flows are traded in financial markets
pricing of risks
labor goods
transformation process
capital
goods services
info
• takes time !
• has risk !
• creates value ?
4.The firm
expertise is an important production factor:
Thus market prices exists for claims on the future cash flows
of the firm.
This means that for each claim on future cash flows the
Market Value can be calculated/ estimated.
Inclusion of options / contingent claims.
4a 3
2
5
4b
1
investors
2. generate funds
3. investment in real activities
4. returns from real activities
a. re-investment in firm projects
b. distribute to participants: dividends, interests, amortization
© 2019 Jaap Spronk UOC & GEMFM-Global Network NY
Introduction to Finance
uncer-tainty
description picture of the
of the firm firm’s future
criteria for evaluation of
firm evaluation prefe- this future
rences
alternative selection of
opportunities alternatives
feasi-bility
8.Financial Markets
The individual ‘taste’ and ‘perception’ , i.e.
• time value of money
• perception of risk
• attitude towards risk : is different for different persons
But claims on future, uncertain cash flows are traded in financial markets
prices for borrowing & lending
pricing of risks
max { value } = interpersonal objective
8.Financial markets
deal with (uncertain) cash flows over time
FINANCIAL ECONOMICS:
ALLOCATIVE DECISIONS, taken on the basis of
VALUE that is formed as a MARKET PRICE.
Value comes from future & uncertain cash flows