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

2. Lecture Notes
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)
Finance 319
Finance 319

3. 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
Finance 319

4. 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
Finance 319

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

6. 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)
Finance 319

7. 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)
Finance 319

8. 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)
Finance 319

9. 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.
Finance 319

10. 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
Finance 319

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

12. 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
Finance 319

13. 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
Finance 319

14. 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
London Stock Exchange: The Economist, 2000, Sept. 2.
Finance 319

15. 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
Finance 319