1. CAPITAL CASINOS By Tessa Voors

2. Quick Recap Money not in bank? Wasting an opportunity No interest Risk of inflation Money in bank interest Banks make money by receiving more interest than they pay

3. Quick Recap What influences share prices? Current profitability Extent of assets Rumors about company’s future

4. Content Buying a business Buying Bonds Derivatives Hedge Funds Sovereign Wealth Funds

5. Buying a business Direct owning of shares Indirect owning of shares Private equity

6. Direct owning of shares Entitled to dividends Can vote for the board of directors Interest may clash with those of the board of directors: Principal-Agent problem

7. Principal-Agent Problem Principals (shareholders) Value of the holding must rise High dividends Profit on investment Agents (Board of Directors) Want long-term growth Reinvest profit in R&D instead of paying high dividends

8. Indirect owning of shares Shares owned by institutions: 50% in US & 67% in UK Insurance companies or pension funds Claim to manage your money better than the average investor But: only as long as the market is rising they look competent

9. Private Equity Firms Buy a private or public company Believe they can manage it better Sell the company for a profit Use a loan to buy up all the shares Private equity firms are often owned by financial firms

10. Buying Bonds 1. Issuer receives sum of money 2. Pays a fixed interest rate 3. Repays the initial sum after a certain period Offers no control in issuing party Bond price affected by: Market interest rate The closer to the redemption date

11. Junk Bonds Corporate bonds have higher yields The less reliablethe higher coupons Rated B-high yield Junk bond Offer generally 8 percentage points more

12. Asset-backed bonds In event of default: owner has degree of ownership Mortgage bond

13. Government Bonds & National Debts Safest type of bond Sovereign debt US: TreasuriesUK: Gilts Used to balance income and expenditure If more income than expenses: can buy back its own bonds

14. Derivatives Contracts that are derived from shares or bonds High betting level Work like insurance policies Bought to hedge companies themselves

15. Types of Derivatives Futures To buffer against future price changes by locking future transactions at current price Swaps Credit Default Swap: pay someone else to take the risk Does not entirely remove risk

16. Derivatives Contracts that are derived from shares or bonds High betting level Work like insurance policies Bought to hedge companies themselves Used for speculation Volume of trading in derivatives exceeds the trade in the underlying commodity

17. Hedge Funds Carry out speculative trading in derivatives “hedging” against risk Mutual funds for the rich “2 and 20” Aim for high absolute returns Use shorting disastrous consequences Frantic trading volatile markets

18. Hedge Funds

19. Sovereign Wealth Funds Held by government Invested abroad Mainly oil revenues, trading surpluses Concern: buying strategic assets

20. So in the end.. Involves risk Unstable financial systems Vulnerable to external events Manageable with regulation at national level

21. Questions?