Finance 319 Lecture 1 Galina A Schwartz Department of Finance Lecture Notes 01.08.2001 Finance 319 Lecture 1 Galina A Schwartz Department of Finance University of Michigan Business School 01.08.2001 Finance 319 Finance 319

Lecture Notes 01.08.2001 Practical Matters I Prerequisites: Fin 300, CSIB 310 (could be taken concurrently) Attendance -- desirable, but not mandatory Three Home Assignments [20%] & Case Study (LTCM)[20%] Class Participation -- up to 40% (substitutes for written work) 01.08.2001 Finance 319 Finance 319

Practical Matters II Midterm: take-home [30%] Final Exam [30%] Midterm Score could be dropped [then Final is 60%] Additional time could be purchased on the Final Exam 01.08.2001 Finance 319

Practical Matters III Readings: on the Web, or /and distributed in Class Textbook: NEW EDITION Levich, (2001), International Financial Markets (expected early February) See Syllabus for all practical matters 01.08.2001 Finance 319

Practical Matters IV How to find me: (or see Syllabus) My office: D3270A (Davidson Hall) My e-mail: galka@umich.edu My office hours: Mon., 10am -12pm & Th., 3pm-5pm, or by appointment 01.08.2001 Finance 319

Subject & Structure International Financial Markets I. Foundations of IF: International Financial System (Levich, Part I) Foreign Exchange Markets (Levich, Part II) Regulatory Issues (Levich, Part VII) 01.08.2001 Finance 319

Subject & Structure (cont.) International Financial Markets II. Current Institutions Offshore and Onshore Markets (Levich, Part III) Financial Instruments: Derivative Securities [Futures, Options, Swaps] (Levich, Part IV) International Asset Portfolios Bond and Equity Portfolios (Levich, Parts V & VI) 01.08.2001 Finance 319

Why IF? Why to study International Financial Markets (increased importance) How do we study them (dynamic analysis of player incentives) What issues are important (technology, legal and regulatory framework, market micro structure, macroeconomic parameters) 01.08.2001 Finance 319

Our Approach to IF Less case oriented, more analytical Why? Enables us to analyze a wider class of problems Less computational, more conceptual [Less quantitative, more qualitative] Why? Think of your competitive advantage in today’s world of high specialization. 01.08.2001 Finance 319

Theory and Reality Theory is a caricature on reality Theory approximates reality Theory: axioms (assumptions) Reality: axioms do not hold Our task: to determine which axioms are violated (and how badly) Our task: how this violation alters the results of theoretical model 01.08.2001 Finance 319

Examples Axiom: PCM (Perfect Capital Markets) Its Violations (due to non-zero transaction costs, uncertainty, taxes and other regulations) Perfect competition? 01.08.2001 Finance 319

Game Theoretic Analysis Players (Governments, Regulators, Central Banks, Financial Institutions, Corporations, Individuals) Their objectives (for example, profit maximization) & possible actions Are these games repeated? Dynamic world > Dynamic games 01.08.2001 Finance 319

Skill to Master Financial information analysis It is: a difficult, challenging and slow to learn skill It is: a rigorous approach It is: frustrating at first Then, it is rewarding 01.08.2001 Finance 319

Next Lecture Functions of Money Governments & Banks & their roles Balance of Payments To read: Levich, Chapters 1 & 2 Summers, L., 2000, AER, Vol. 90, No. 2, pp. 1-27. London Stock Exchange: The Economist, 2000, Sept. 2. 01.08.2001 Finance 319

Summary of Today Focus of Finance 319 Financial institutions & instruments (+ their history) Why do they exist & what role do they play The impact of Hi-Tech on Financial System (past, present, future) International Financial Law & its future 01.08.2001 Finance 319