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THE NOTION AND FUNCTIONS OF FINANCE

Dr Katarzyna SumChair of International FinanceWarsaw School of Economics

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Getting started

Slides available at:

http://akson.sgh.waw.pl/~ksum/

Contact:

ksum@sgh.waw.pl

Office hours: Monday 9.30 in Klub Jajko

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Final note

Multiple choice test

The scope of the exam- the syllabus

available at

http://akson.sgh.waw.pl/~ksum/

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Broad lecture outline

Public finance Corporate finance International finance Behavioural finance

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Basic literature

R.W.Melicher, E.A.Norton, Introduction to Finance. Markets, Investments and Financial Management, John Wiley&Sons,2007;

A.Shleifer, Inefficient Markets, An Introduction to Behavioral Finance, Oxford University, 2000;

S.A.Ross,R.W.Westerfield, B.D.Jordan, Fundamentals of Corporate Finance, McGraw Hill Companies, N. York, 2006;

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The notion of finance

Finance- a part of economics concerned

with the analysis of monetary flows

Finance as a process related to

monetary flows

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Financial phenomenon vs. monetary phenomenon

Financial phenomena are related to

monetary flows between the respective

market players

Each financial phenomenon is a monetary

phenomenon but not every monetary

phenomenon is a financial phenomenon

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Examples of monetary and financial phenomenons

Financial phenomenon- the accumulation of savings, the purchase of goods or services

Monetary phenomenon- inflation,

currency appreciation

The functions of money

Medium of exchange e.g. transactions

Unit of account- e.g. transaction

valuation

Store of value e.g. investments and

savings

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The functions of finance

Medium of allocation- investments and

saving

Medium of distribution- e.g. transactions

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The classification of financial phenomena

Classification according to market players

Classification according to subject of monetary

flows

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Classification according to market players

Monetary flows between: Households

Public institutions

Insurance companies

Banks and other financial institutions

Companies

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Classification according to subject of monetary

flows

Market monetary flows eg. payment of wages, payment

for goods and services- shaped by demand and supply

Redistribution or transfer flows- eg. taxes, subsidies-

shaped by legal acts

Credit flows- loans from banks

Savings- frozen monetary flows

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The financial system (1)

A set of legal regulations, principles and institutions,

which are necessary for the right fulfilment of the

functions of finance and their regulation

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The financial system (2)

Legal regulations- rules laid down in the

economic and financial legal acts

Organisatory principles- resulting from

economic theory and practice eg. the principle of

budgetary equilibrium

Institutions, the activity of which is focused on

finance eg. the ministry of finance, banks

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The financial system (3)

The budgetary system

The banking system

The insurance system

The corporate finance system

The household finance system

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The financial market

Miejsce spotkania popytu i podaży produktów finansowych

Główne segmenty: Rynek pieniężny Rynek kapitałowy Rynek walutowy Rynek derywatów

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The financial market

The aggregate of demand and supply of financial products

Main segments: The money market The capital market The foreign exchange market The derivatives market

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Financial policy

An element of the economic policy

Fiscal policy- the management of the public

sector income and expenses (local and central

government)

Monetary policy- stabilization of the purchasing

power of domestic currency

Financial supervision

Banking supervisionSupervision of insurance companiesPension system supervisionCapital market supervision Centralized supervision (all functions are

carried out by one institution) decentralized- many institutions

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Corporate finance

Ways of financing enterprises and ways of

capital provision

Financial reporting

Financial analysis

Company vaulation

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Public finance

Public income and expenditure

Ways of financing the public finance sector

Deficit and public debt servicing

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Behavioural finance (1)

Financial processes viewed as a

consequence of market participants

behaviour

Abstracting from the classical finance

assumptions i.e. from rational expectations

and market effectiveness

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Behavioural finance(2)

Examples:

Financial markets modelling (taking into account

speculative bubbles)

Valuation of equity securities e.g. taking into account

various reactions of the investors

Exchange rate forecasting e.g. with risk premia

Explaining financial crises

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International finance (1)

Finance is international per se!

The functions of finance fullfilled internationally

International financial institutions: central banks, public institutions,

private enterprises, banks, households which are active on

international financial markets

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International finance(2)

The role of banks in servicing international financial

transactions

International regulations of finance

National regulations, supranational regulation (EU),

guidelines of international institutions (Basel Committee)

International money

L. Oręziak, Euro nowy pieniądz, PWN, Warszawa 2002.

Private transactions

Official transactions Function

Price quotation Reference currency Unit of account

Transaction currency Intervention currencyMedium of exchange

Investment currency Reserve currency Store of value

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Literature

R.W.Melicher, E.A.Norton, Introduction to Finance. Markets, Investments and Financial Management, John Wiley&Sons,2007