Finance 2 (BFIN)

Introduction, Motivation and

Overview

Dr. Vu Thi Hong Nhung

INVESTMENTS | BODIE, KANE, MARCUS

 Motivation
Fundamental Challenges of Finance
All Business Activities Reduce To Two Functions:
• Valuation of assets (real/financial, tangible/intangible)
• Management of assets (acquiring/selling)
Business Decisions Involve Valuation and Management
• “You cannot manage what you cannot measure”
• Valuation is the starting point for management
• Once value is established, management is easier
Objectives + Valuations ⇒ Decisions

1-2 VGU
 Motivation
Fundamental Challenges of Finance
Valuation
• How are financial assets valued?
• How should financial assets be valued?
• How do financial markets determine asset values?
• How well do financial markets work?
Management
• How much should I save/spend?
• What should I buy/sell?
• When should I buy/sell?
• How should I finance the transaction?

1-3 VGU
 Time and Risk
Two Other Factors That Make Finance Challenging
1. Time
• Cashflows now are different from cashflows later
• Time flows in only one direction (as far as we know)
2. Risk
• Under perfect certainty, finance theory is complete
• Risk creates significant challenges
• How should we model the unknown?
To Address These Two Issues:
• Use historical data
• Use mathematics (probability and statistics)
• Challenges can easily overwhelm current mathematical abilities

1-4 VGU
 Investment (BFIN) 2019
Optimal Risky Bond Prices
The Capital Futures markets Futures and
Portfolios and Yields
Asset Pricing (C2 & C3) Forwards
(C7) (C14)
Model (C9) Valuation (C5)

Fixed-Income Derivatives
Portfolio Theory
Securities (JH)
and Practice
(BKM) (BKM)

Arbitrage Pricing
Theory and The Efficient The Term Managing
Multifactor Market Structure of Options Options Swaps
Bond
Models of Risk Hypothesis Interest Rates market valuation (C7)
and Return (C10)
Portfolios
(C11) (C15) (C10, 11 & 12) (C13 & C15)
(C16)