1. Introduction, Financial Terms and Concepts

17 Nov 2023 (1 year ago)

Introduction (3m0s)

The aim is to provide basic knowledge about financial markets and terminologies
Majority of attendees are undergraduate students (80%) and graduate students (20%)
Audience background varies from finance, math, engineering, and other majors, including attendees from other universities
The professor encourages communication through emails and office visits for feedback on class pace and content clarity
A personal story is shared highlighting the evolution of finance from a non-quantitative field to one dominated by professionals with strong mathematical and computer science backgrounds
Concepts in finance are to be understood as rapidly evolving over the past 30 years rather than being definitive truths
Financial markets began with the exchange of goods, leading to centralized stock exchanges and OTC (over-the-counter) trading
It is emphasized that currency is also traded, with different countries having specialized exchanges for local products

Stocks can be traded individually or as part of baskets called stock indices
The process of a company going public is through an IPO (Initial Public Offering), representing a transition from a private to a public company

Secondary trading occurs after a stock is listed on an exchange.
Financial products include equities, loans, bonds, and commodities.
Bonds are issued by governments and corporates for various financing needs.
Commodities are traded mostly as futures, with physical handling like warehousing.
Asset-backed securities use assets to issue debt, important in the 2008 financial crisis.
Derivative products like swaps and options are complex and tailored for specific needs.
Banks, following the Glass-Steagall repeal, consist of commercial banks and investment banks, which are involved in various financial services.
Investment banks are structured into fixed income, equities, and the Investment Banking Division (IBD).
Asset managers are major financial market participants.
Financial markets can be viewed as a zero-sum game with winners and losers based on trades and markets.

Financial markets exist to connect lenders with borrowers for capital access.
Investment leads to potential higher returns compared to basic savings.
Market participants include banks, dealers, brokers, and various types of investors.
Dealers facilitate market making by providing liquidity and taking the opposite side of trades as principal risk.
Brokers match buyers and sellers to earn commissions without taking principal risk.
Mutual funds, insurance companies, pension funds, and sovereign wealth funds invest capital for returns.
Hedge funds look for profit opportunities through various strategies.

Hedge funds employ different strategies to capitalize on market inefficiencies.
Private equity invests in companies for operational improvements and profitability.
Governments influence markets through policy and interest rates.
Corporations hedge against market changes via financial instruments.
Trading types include hedging existing exposures, market making for bid-offer profit, and proprietary trading, which is restricted under new regulations.

Hedge funds and portfolio managers focus on generating returns and controlling risks using alpha and beta metrics.
Beta represents the correlated movement with a benchmark index, while alpha denotes the return above the benchmark.
Hedging strategies, such as currency hedging, are used to lock in costs or returns and mitigate risk.
Examples include borrowing in a currency with a lower interest rate (Japan) and investing in a currency with a higher rate (Australia), while hedging against potential currency fluctuations.
Entities like corporations and banks must manage risks including currency exposure, interest rates, and assets vs liabilities on balance sheets.

Market making provides liquidity and involves managing risk by balancing 'Greeks' like delta, gamma, theta, and vega, which describe various sensitivities in a trading portfolio.
VaR (Value at Risk) and capital usage are important concepts for evaluating risk and financial stability.
Various trading strategies include directional trading, arbitrage, value trading, systematic trading, and high-frequency trading.
Fundamental analysis, special situations, and private equity are other approaches.
Mathematics plays a crucial role in financial markets in areas like pricing models, risk management, and developing trading strategies.
Perpetual profit-making trading strategies do not exist; strategies require constant research and adjustment to remain effective.