Introduction to Finance.doc

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1、Introduction to Finance320ContentsPart 1 Money and Credit6Section 1 Money and Money Supply6I. The Functions of Money6II. The Meaning and Types of Money7Section 2 Credit and Money Creation14I. Credit14II. The Forms of Credit16III. Money Creation21Part 2 Money Demand and Money Supply26Section 1 Money

2、Demand26I. The Implication of Money Demand26II. The Factors That Determine Demand for Money27III. The Quantity of Money Needed and Its Measurement29IV. Theories of Money Demand31Section 2 Money Supply42I. The Quantity of Money Supply and Some Concepts Relating to It42II. The Mechanism of Money Suppl

3、y44III. The Theories of Money Supply49Part 3 Inflation and Deflation52Section 1 Inflation52I. The Overview of Inflation52II. Inflation Effects58III. The Counter-measures of Inflation64IV. Deflation67Part 4 Balance-of-Payments74Section 1 Balance-of-Payments Structure74I. Current Account74II. Capital

4、Account75III. Statistical Discrepancy: Errors and Omissions76Section 2 Balance-of-Payments Adjustments77I. Price Adjustments77II. Interest Adjustment79III. Income Adjustment80IV. Monetary Adjustment80Section 3 Theories of Balance-of-Payments82I. The Elasticity Approach to Exchange-Rate Adjustment82I

5、I. The Absorption Approach to Exchange-Rate Adjustment84III. The Monetary Approach to Exchange-Rate Adjustment85Part 5 Foreign Exchange87Section 1 Exchange-Rate Determination87Section 2 Types of Foreign-Exchange Transactions89Part 6 Macroeconomic Policy in an Open Economy91Section 1 Economic Policy

6、in an Open Economy91I. Economic Objectives of Nations91II. Policy Instruments91III. Exchange-Rate Policies and Overall Balance93IV. Monetary Policy and Fiscal Policy: Effects on Internal Balance94V. Monetary and Fiscal Policies : Effects on External Balance97VI . Monetary Policy and Fiscal Policy: P

7、olicy Agreement and Policy Conflict98Section 2 External Debt100I. Definition and Classification100II. External Debt Sustainability100III. Indicators of External Debt Sustainability101Section 3 Foreign Reserve Management106I. Foreign Reserve106II. Foreign Exchange Reserve Management110Part 7 Financia

8、l Regulation119Section 1 Theory of Financial Regulation119I . Objectives of Financial Regulation119I. The Economic Rationale for Financial Regulation120Section 2 Models and Contents of Financial Supervision128I. The Institutional Approach to Supervision129II. The Functional Approach to Supervision13

9、1III. The Integrated Approach to Supervision132Section 3 Harmonization of International Financial Regulation135I. International Harmonization of Financial Regulations135Part 8 Commercial Bank Businesses142Section 1 Bank Liabilities142I. Structure of Bank Liabilities142II. Bank Deposits143III. Core D

10、eposits and Volatile Borrowings144IV. Deposits Pricing145Section 2 Bank Borrowings148I. Liability Management148II. Nondeposit Sources of Funds149III. Choosing among Alternative Nondeposit Sources151Section 3 Loan Types and Policies154I. Major Types of Loans154II. Loan Policy157Section 4 Loan Procedu

11、res162I. Business Development and Credit Analysis162II. Loan Execution and Administration165III. Credit Review166Section 5 Lending to Businesses169I. Types of Business Loans169II. Evaluating Business Loans174III. Pricing Business Loans184Section 6 Lending to Individuals186I. Types of Loans Granted t

12、o Individuals and Families186II. Characteristics of Consumer Loans188III. Credit Analysis of Consumer Loans189Section 7 Lending to Small Businesses192I. Definition of Small Business192II. Financing Difficulties for Small Business Lending193III. Evaluating Small Business Lending194Section 8 Trade Fin

13、ance196I. Packing Loans196II. Bill Purchase197III. Export Credit199IV. Factoring200V. Forfeiting203Section 9 International Settlement205I. Outward Remittance205II. Inward Remittance207III. Clean Collection208IV. Documentary Collection209V. Letters of Credit212VI. Letters of Guarantee215Section 10 Se

14、curitization217I. Pooling and Transfer218II. Issuance218III. Credit Enhancement and Tranching219IV. Servicing220V. Repayment Structure221VI. Motives for Securitization221Section 11 Bank Letters and Telecommunications225I. Bank Letters225II. Telex237III. SWIFT241IV. Memos253V. E-mail255Part 9 Basic T

15、heory of Asset Pricing257Section 1 The Portfolio Theory of Harry Markowitz257I. Background257II. Measures of Risk257III. Expected Rates of Return258IV. Variance and Standard Deviation of Returns for an Individual Investment258V. Covariance and Correlation of Returns for a Portfolio259VI. Standard De

16、viation of a Portfolio260VII. Demonstration of the Portfolio Standard Deviation Calculation260VIII. The Efficient Frontier264Section 2 The Capital Asset Pricing Model266I. The APT Model270II. The Comparison between APT and CAPM271III. An Example272IV. The Multifactor Models272Part 10 Financial Marke

17、t275Section 1 Introduction to Money Markets275I. Definition of Money Markets275II The Instruments of Money Markets276Section 2 Introduction to Capital Market288I. Definition of Capital Markets288II. The Structure of Capital Markets288III. Bond Market290IV. Stock Markets Securities292V. Characteristi

18、cs of the Stock Market293Section 3 Mutual Funds and Other Investment Companies297I. The Function of Mutual Funds297II. Different Types of Funds298Section 4 Derivatives Markets301I. Forward Contracts301II. Futures Contracts304III. The Option Contract310IV. Swap318Part 1 Money and CreditSection 1 Mone

19、y and Money SupplyI. The Functions of Money1. Medium of Exchange or Means of ExchangeMoney as a medium of exchange effectively eliminates the requirement ofdouble coincidence of wants and overcomes the difficulty of barter. Money alsopromotes production efficiency by allowing people to specialize in

20、 what they do best.Money is therefore essential in an economy: It is a lubricant that allows the economyto run more smoothly by lowering transactions costs, thereby encouragingspecialization and division of labor. In history, money first facilitated exchange,which made it possible for people to enga

21、ge in what fit them most and then appeareddivision of labor in each trade, which brought about a great growth of production. In19th century, western countries adopted the method of specialization and division oflabor in their production on a large scale. As a result, there were increasingly amplegoo

22、ds people could choose and price dropped greatly. The impact of money oneconomy was enormous.2. Unit of Account or Standard of ValueIn a barter economy, money does not perform this function as unit of account. In a barter economy, double coincidence of wants is not only hard to find, but also diffic

23、ult for two traders to agree upon an exchange ratio. For example, how many pounds of apples should be exchanged for a bag of wheat? When only two goods are traded, only one exchange ratio must be determined, but as the number of goods produced in the economy increases, the number of exchange ratios

24、grows greatly. Negotiating the exchange ratios for goods exchanges is complicated in a barter economy because there is no common measure of value. People have to determine and keep in mind numerous exchange ratios of goods. Using money as a unit of account reduces transaction costs in an economy by

25、reducing the number of prices that need to be considered. The benefits of this function of money grow as the economy becomes more complex.3. Store of ValueA store of value is used to save purchasing power from the time when income isreceived until the time when it is spent. That means money is used

26、to defer the timeof exchange of goods and services. This function of money is useful because most ofus do not want to spend our income immediately upon receiving it but to wait untilwe have the time or the desire to shop.The effectiveness of money as a store of value depends on two factors: one isth

27、e easiness that people can get goods with money when in need of them; the otheris the price level because the value of money is fixed in terms of the price level. Adoubling of all prices implies that the value of money has dropped by half;conversely, a halving of all prices implies that the value of

28、 money has doubled. Ininflation, when the price level is increasing rapidly, money does not serve the store-of-value function well because money loses value rapidly, the purchasing power ofmoney declines and people will not be willing to hold their wealth in this form. Somoney can function as store

29、of value only when its value is stable as an asset.II. The Meaning and Types of Money1. The Meaning of MoneyMarx defines money as a special commodity that permanently serves as ageneral equivalent. There are prerequisites for Marx s definition of money in threeaspects: first, money is a commodity wi

30、th value and value in use. Only in this casecan money play various functions; second, money has the ability to display value ofgoods with its own value in use, i. e. money can serve as a general equivalent;third, money itself is a commodity with value and value in use representing generalpurchasing

31、power, so money becomes generally accepted. Obviously, Marxs theory is based on the system of metallic money. When discussing paper money circulation,Marx explains that paper money is the representative of metallic money and is asymbol of value and functions as money indirectly. But in modern societ

32、y, money incirculation in most countries has no relation with precious metal, such as gold andsilver, so Marxs theory cannot explain this phenomenon wholly. Western economists define money (or, equivalently, the money supply) as anything that is generally accepted in payment for goods or services or

33、 in the repayment of debts. Currency, which is bank notes and coins, clearly fits this definition and is one type of money. When most people talk about“money”today, they are talking about currency. Therefore, to define money merely as currency is much too narrow today because besides currency, payme

34、nts can also be made by the transfer of deposit balance via checks or electronic transfer system. So accepted generally in payment for purchases of goods and services or in the repayment of debts, checking account deposits are important parts of money as well. Therefore an even broader definition of

35、 money is often needed because other items such as savings deposits can in effect function as money if they can be quickly and easily converted into currency. This is also true with time deposits. They are all items that are“generally acceptable” in making payment.2. Types of MoneySince the primitiv

36、e economy, money changed from commodity money tometallic money, from metallic money to representative money, from representativemoney to credit money and finally electronic money. In economic life, the need formoney is so strong that almost every society, except the most primitive one, inventsit.(1)

37、 Commodity money or money in kindA commodity that becomes a medium of exchange is called a commodity moneyor money in kind, when its value in the non-money use is equal to its value asmoney. The commodity money is the oldest form of money, mainly used in a bartereconomy. Take diamond for example, it

38、 can be used both as money in exchange forgoods and services or discharge of debts and as a general commodity inconsumption, and the value of diamond as money is equal to the value of it asgeneral commodity. Consequently diamond becomes commodity money. In history alot of commodities were used as me

39、dium of exchange, such as stones, whale teeth,sandal wood, tortoise shells, rice, salt, copper, silk, leather, diamonds, etc.With development of exchange of goods, such kinds of commodity money showedtheir shortcomings, say, some of them were very large in size and indivisible so thatthey could not

40、be carried around which impeded their serving as ideal medium ofexchange; others were not stable in value which hindered them from functioning asstandard of value and store of value. In practice, over the past 4,000 years, thepredominant commodity moneys have been precious metals: mostly silver and

41、gold,also called full-bodied money. Full-bodied money was one of stages of commoditymoney. At the stage of commodity money or money in kind there were a lot ofcommodities functioning as money which were often changing and not fixed; at thestage of full-bodied money the special commodity as money cen

42、tered on only onekind of commodity, which was precious metals like gold or silver. Gold and silverare in great demand for ornamentation because they are durable, beautiful, and canbe shaped. The supply of these metals is so limited so that very small amounts havegreat value. This makes them easy to

43、carry around as money. Furthermore, they canbe refined into the pure metal rather easily, making their quality uniform. Variousquantities can also be weighed out so that exchanges of varying values can be made.Almost all countries have passed the stage of precious metallic money which used tobe a pe

44、rfect form of money.(2)Representative moneyRepresentative money or representative full-bodied money refers to paper moneyfully backed by a precious metal.Representative money first emerged in Britain. During the latter part of MiddleAges the earliest forerunners of private banksGoldsmiths themselves

45、 had massivevaults and secure facilities for the safeguard of their precious metals. Thusindividuals owning gold or other precious metals without secure facilities for theirsafeguard, brought them to the Goldsmiths in exchange for the Goldsmiths receiptsor IOUs. It was often more convenient to condu

46、ct a transaction by signing over thereceipts rather than handing over the gold itself. As the receipts or IOUs thencirculated freely they became the first representative full-bodied money.Later bankers went into the loan business, lending either gold itself or issuingadditional receipts or notes. In

47、 so doing the bankers issued notes for more gold thanthey actually had in their vaults. This practice not only represents one of the earliestexamples of credit money but also describes the origins of modern fractional reservesystem of commercial banking and money creation. Later, governments also issuedmoney in the form of paper to represent certain quantities of gold or silver kept ondeposit by the government to back such pa