论清华大学经管学院的金融工程（英文版）ppt课件.ppt

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1、1INTRODUCTION TO FINANCIAL ENGINEERING Fred SongSeptember 20012Introductory What is Finance? What is Financial Engineering? Whats the role of Financial Engineering in New Economy? New economy Financial engineering and e-commerce3What is Finance? Money & Banking Monetary Economics International Finan

2、ce International Economics4Corporate FinanceCapital Market(Investments)Financial EconomicsMultinational Corporate FinanceInternational Financial MarketFinancial Engineering5What is Financial Engineering? Generalizing: Financial Engineering involves the design, the development, and the implementation

3、 of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance. Specializing: Financial Engineering is risk management via creative structural tools.6FINANCEI.T.ENGINEERINGF.E.7CHAPTER ONE: MM Theory and No ArbitrageMM Theory Two measurements of

4、valueAccounting: book value historic costFinance: market value net present value8Assets = Liabilities + Equity Accounting Equality: duel entity systemBook value measurementFund useFund source Finance Equality: Fund use = Fund sourceMarket value measurement9 Corporate Finance Assets Liabilities and E

5、quity Asset 1 Asset 2 Liabilities Asset 3 . . Equity . Asset nTotal Assets Total Liabilities and Equity?_1niiAssetAssetsTotalAccounting: Yes!Finance: No!Capital MarketReal EconomyNPVFirm Value + NPV10Liabilities Value Equity ValueLiabilities Value Assets ValueCapital StructureFinancial leverage:orHa

6、s a change of financial leverage any impact on the firm value?11M&M TheoryM&M assumptions: Frictionless assumptions No income taxes No transaction costs No information asymmetry No cost to resolve interest conflicts among stakeholders All liabilities are risk-free12Notes: A mini - caseTwo companies

7、EBIT Capital structure Firm value$10 million p.abonds: $40 million, 8%shares: 600,000As share price: $100 per shareexpected return: 10%1 million shares $100 millionB ?A Bs bond: risk-free the share number is supposed share expected return: ?13(Risk-free) NoPosition Immediate Cash Flow Cash Flow in t

8、he FutureReplication of As Stock Using Bs Stock and BondsBs Total Payments = Bs Net Earnings + Interest Payments= ( EBIT - $3.2 million) + $3.2 million= EBITSuppose price of Bs stock = $90 per shareShort sell 1% As shares at $100 per shareBuy 1% Bs shares at $90 per shareBuy 1% Bs bonds+$1,000,000 1

9、% of EBIT $540,0001%( EBIT $3,200,000 ) $400,0001% $3,200,000 Net Cash Flow$60,0000ArbitragePrice of Bs stock= $100 per share14 M&M Proposition 1 Proposition 1: Under M&M Assumption, i.e., in the frictionless environment, the total market value of a firm is independent of its capital structure. Thin

10、k of the firm as a gigantic pizza, divided into quarters. If now, you cut each quarter in half into eights, the M &M proposition says that you will have more pieces, but not more pizza. Merton Miler15Probability Distribution of EBIT and EPS for the Two CompaniesState of the EconomyEBITCompany A Comp

11、any B EPS Net EPS(1 million shares) Earnings (600,000 shares) Bad business $5 million $5 $1.8 million $3.00Normal business 10 10 6.8 11.33Good business 15 15 11.8 19.67Mean 10 10 6.8 11.33Standard deviation 4 6.81Beta 1.0 1.0 1.67NOTE: Each state of the economy is equally likely.16The cost of capita

12、l depends on its use and not on its source.Proposition!17Weighted Average Cost of CapitalCost of capital of the firm without liabilityEDDrEDErWACCfeEDrWACCWACCrfe%10ABWACCWACCRisk premium of WACCFinancial leverageM&M Proposition 2:The cost of capital of a firm equals the cost of capital of the firm

13、without liability and the risk premium of WACC multiplied by financial leverage.18All transactions in financial markets are zero NPV transaction activities.Proposition!19Implication of M&M Theory Frictionless environment does not exist in the real world. Taxes Transaction costs Information asymmetry

14、 Costs resolving interest conflict Liabilities are risk-bearing20 Tax ShieldCompany A:Tax rate: T = 33%Company A Company BClaimantCreditorsShareholdersGovernment Tax Authority Total Firm Value before Taxation$100 million $100 million067 million33 millionCompany B:(1T)(EBITInterests)+Interests = (1-T

15、)EBIT+TInterests40.0 million40.2 million19.8 million$13.2 million21 WACC with Taxes Other M&M assumptions holdEDTEBITEDDTrEDEETDrEBITEDDTrEDErWACCfffe1111erHas a change of financial leverage any impact on the firm value ?Answer: Yes !Discount rate for cash flow of the firm22 Stock PriceShare Number

16、Total Equity Share PriceCompany A:1 million67.0 million$ 67Company B:600,00040.2 million$ 67?If Company A were to announce an issue of $40 million debt to be used to repurchase and retire common stockAs capital structure = Bs capital structureMarket reaction: price of As share would go up to reflect

17、 the $13.2 million tax shield: $(67.0 + 13.2) million / 1 million = $80.2 per share.Where is the benefit of the tax shield?23State Prices100$AP107$AuP98$AdPu = 1.07d = 0.98103$5 .98$1$02. 1$02. 1$Risk-free security%2frRisk-free interest rateBond ABond B?BP24 Basic SecuritiesBasic Security 1 Basic Se

18、curity 21$01$0ud= ?= ?Portfolio Basic Security 1, Basic Security 2AuPAdPreplicatingAuPAdPBond AAdAudPuPAP=1duduNo Arbitrage25 Replicating risk free securityPortfolio Basic Security 1, Basic Security 202. 102. 1replicatingfdfurr111=1$02. 1$11$fr02. 1$11$frLetffrr1fdudurdu115447. 04357. 0durrudurdrffd

19、ffuState Prices26 Replicating Bond A and Bond B100985447. 01074357. 0AdAuAdPuPP53.985 .985447. 01034357. 0BPNo ArbitrageQuestions ?Do there exist such kind basic securities in the real world?Are there enough basic securities that can be used to replicate all the payoff of securities in the market?An

20、swers :Find some equivalent instruments instead of basic securities.It involves in market completeness.27 Replication via equivalent instrumentsPortfolio Bond A, market value risk-free securityL?BP103$5 .98$replicating Bond B5 .9802. 19810302. 1107LL02. 15 .49,21L53.98100LPB28 Market Completeness Wh

21、enever the number of different instruments used to replicate securities equals the number of states so that we can attain any payoff of securities in future , in such a circumstance, the market is a complete one. Otherwise, themarket is incomplete.Completeness is a c o r e c o n c e p t o f finance

22、theories !29Summary of Chapter One No Arbitrage Equilibrium Replication Methodology State Prices Technology30CHAPTER TWO: Time Value of Money and Term Structure of Interest Discounted Cash Flow FormulaYes ! is the expected rate of return, i.e., the mean of the discount rates for different termsrLetN

23、o ! is the discount rate that cannot be used for so long periodntttrCPV1)1 (?01)1(PrCPVnttttnttttntttrCrC11)1 ()1 (0)1 (10ntttrCPNPVr31 Determination of Interest Capital production ability the more the capitals expected return, the higher the interest rates and vice versa. Uncertainty of capital pro

24、duction ability the more the uncertainty, the higher the risk premium required and the higher the interest rates and vice versa. Time preference of consumption the stronger preference to current consumption, the higher the risk premium required and the higher the interest rates and vice versa. Risk

25、aversion the more the risk aversion, the higher the risk premium required and the lower the risk-free interest rates. Four basic factors32 The Benchmark of Interest Yield to Maturity (YTM) YTM varies with different financial instruments, because the exposure of financial instruments are quite different and the required risk premiums differ from each other.Risk-free interest varies with terms . Its called the term structure of interests. Risk-free interests?No!Yes!