Ec102 may 18

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Ec102 may 18

  1. 1. INTRODUCTION TO FINANCIAL ECONOMICS<br />May 18, 2011<br />
  2. 2. QUIZ <br />Use a size 2<br />Will start at exactly 7:31am<br />Part 1 – 5 minutes<br />Part 2 – 10 minutes<br />
  3. 3. QUIZ PART 1: IDENTIFICATION<br />1. How much you’re willing to pay for $1.<br />2. When a bid and an offer is equal, trade happens. This is called a ____.<br />3. Buying money at low price, selling it at a high price.<br /> 4. Clearing house for the Phil. Forex Mkt.<br />5. If your impaired capital is $425M, what is the max amount you can trade?<br />
  4. 4. QUIZ PART 2: EFFECTIVE EXCHANGE RATE<br />Given the ff hypothetical data, compute and interpret the effective exchange rate. Show all solutions (weight, index, EER).<br />
  5. 5. BONUS<br />Using P43.36/$ as reference rate<br />Place a bid and an offer<br />Any two people with matching bids and offers will get 2 points each<br />DON’T COLLUDE.<br />
  6. 6. Intro to the ForEx Market<br />Foreign Exchange Market – market in which individuals, firms and financial institutions buy and sell foreign currency<br />
  7. 7. Intro to the ForEx Market<br />Types:<br />End users – Banks<br />Bank – bank (bulk)<br />Bank – Central Bank (BSP)<br />
  8. 8. Philippine Dealing System<br />Online 9:00am-4:00pm<br />Weighted average<br />Volume<br />Clearing house at Citibank<br />Traders are anonymous<br />Lower is high<br />
  9. 9. 16 Nov 2010: P46.90/$<br />Open: P46.9/$ $100 (volume)<br />Close: P47.9/$ $100 (volume)<br /> $200<br />Always look at volume<br />Weighted ave today is reference rate tomorrow<br />
  10. 10. BID/OFFER<br />Each trader places a bid/offer<br />Bid – how much you’re willing to pay for $1<br />Offer – how much you’re willing to sell $1<br />Max bid < Max offer<br />
  11. 11. BID/OFFER<br />
  12. 12. Currency Arbitrage<br />Buy low, sell high<br />Make money by shuffling money<br />
  13. 13. RULES<br />Each trader deposits PHP and USD in Citibank (clearing house)<br />Impaired Capital<br />Each trader can only buy/sell a maximum of minimum, either ($50M or 20% of impaired capital)<br />
  14. 14. RULES<br />Whatever is smallerbetween $50M or 20% of impaired capital is your trading limit.<br />Bank A <br />$500M, $50M, $100M (20%)<br />Bank B <br />$200M, $50M, $40M (20%)<br />
  15. 15. 2% - 1% - 1% bands<br />If exchange rate reaches +/- 2%, trading stops for two hours<br />Someone might be speculating/panic<br />Dirty flexible exchange rate<br />Creates sort of stability<br />Avoids speculation<br />
  16. 16. FOREX SUPPLY AND DEMAND<br />Exchange rate – price of domestic currency per unit of foreign currency<br />Phil – US: P/$<br />Phil – Japan: P/Y<br />
  17. 17. FOREX SUPPLY AND DEMAND<br />Flexible/floating exchange rate<br />Exchange rate that is market determined<br />Depreciation<br />Appreciation<br />
  18. 18. FOREX SUPPLY AND DEMAND<br />Fixed Exchange Rate <br />Exchange rate that is artificially determined<br />Devaluation<br />Revaluation<br />
  19. 19. EFFECTIVE EXCHANGE RATE<br />Measure of overall performance of domestic currency<br />Able to figure out if Peso is weak or $ is strong<br />
  20. 20. EFFECTIVE EXCHANGE RATE<br />Measure the weight/importance of each<br />Index the forex rates by dividing current year rate by base year rate<br />Multiply weight and index<br />If EER goes down, P appreciates<br />
  21. 21. INTRO TO FINANCIAL ECO<br />Securities and equities<br />Bonds, stocks, T-bills<br />Investment, market value, dividends<br />
  22. 22. STOCK MARKET<br />Stocks – part ownership of a firm<br />Stockowners are part owners<br />Primary Market – stocks are sold to market for the first time (IPO)<br />Secondary Market – where stocks (IPOs, SOs) are sold again<br />NYSE, PSE, NASDAQ<br />
  23. 23. PRIMARY MARKET<br />Initial Public Offering (IPO) – initial stocks signed in with SEC<br />Seasoned Offerings – new pieces of paper sold by listed companies<br />
  24. 24. SECONDARY MARKETS<br />New York Stock Exchange (NYSE) <br />Dow Jones Industrial Average<br />$18B/day<br />NASDAQ – online<br />NASDAQ Composite Index<br />$14B/day<br />Before 2001 financial crisis, bigger than NYSE<br />
  25. 25. SECONDARY MARKETS<br />London Stock Exchange<br />FTSE – “footsie”<br />$7B/day<br />Philippine Stock Exchange<br />Composite Index<br />30 biggest listed representatives of major industries <br />P5B/day = $113M<br />
  26. 26. PHILIPPINE STOCK EXCHANGE<br />Relatively a young and small market<br />Opens at 9:00am, closes at 12:00nn<br />Two floors: Makati, Manila<br />
  27. 27. DIVIDENDS <br />Periodic payment from the firm to its shareholders<br />Cash dividend<br />Stock dividend<br />
  28. 28. VALUATION OF STOCKS<br />BOOK VALUE<br />Equity divided by the number of shares<br />Accountant’s value<br />* given (exogenous), can’t be changed<br />Example<br />Assets = P100M*, Debt = P25M*, Equity P75M*<br />Outstanding shares = 50M* pieces<br />
  29. 29. VALUATION OF STOCKS<br />LIQUIDATION VALUE<br />Net proceeds that would be realized by selling the firm’s assets and paying off it creditors<br />Once the firm is sold, it is no longer the firm, value is now market determined<br />
  30. 30. VALUATION OF STOCKS<br />LIQUIDATION VALUE<br />Example:<br />Assets = P110M<br />Debt = P25M*<br />Outstanding shares = 50M* pieces<br />Solve for equity, price per share<br />
  31. 31. VALUATION OF STOCKS<br />MARKET VALUE<br />Amount that investors are willing to pay for the shares<br />Open market<br />Investors place a value on your stock<br />
  32. 32. VALUATION OF STOCKS<br />MARKET VALUE<br />Example:<br />Price per share = P2<br />Outstanding shares = 50M* pieces<br />Debt = P25M*<br />Solve for equity, solve for assets<br />
  33. 33. HOW DO INVESTORS VALUATE A STOCK? <br />Compute for a rate of return<br />Use this to compute for Price<br />Price = present value of all future stream of income from that stock<br />Present value = value today<br />
  34. 34. HOW DO INVESTORS VALUATE A STOCK? <br />Problem: define P0 by P1<br />Price today is defined by price tom<br />Defining it by itself<br />Solution: Efficient Valuation of Stocks by Robert Lucas<br />
  35. 35. PAYOUT RATIO<br />Dividend divided by earnings per share (EPS)<br />Percentage of that you receive<br />Ex: Stock worth P10, with EPS = P1, dividend = P0.25<br />
  36. 36. PLOWBACK RATIO<br />Retained earnings divided by EPS<br />Percentage that is kept in the firm<br />Plowback ratio = 1-payout ratio<br />Ex: P10 stock, EPS = P1, Payout = P0.25<br />
  37. 37. RETURN ON EQUITY (ROE)<br />Growth of firm per peso of retained earnings<br />Every peso of retained earnings is reinvested and adds to growth of firm<br />
  38. 38. DIVERSIFICATION<br />Strategy designed to reduce risk by spreading portfolio across many investments<br />Each investment has risk <br />GOAL: Minimize risk<br />σ = risk<br />
  39. 39. DIVERSIFICATION<br />Risk is eliminated<br />Risk is not changed<br />Risk is halved <br />Risk is reduced but rate of return reduced<br />
  40. 40. TECHNICAL TRADING RULES<br />Rules followed by traders to buy, sell or hold cash<br />Depend on historical patterns<br />
  41. 41. HOW TO PROFIT IN THE STOCK MARKET<br />Buy low, sell high<br />Don’t trade on a daily basis<br />“Noises” cancel out earning daily<br />Invest in the long run<br />
  42. 42. COMPUTATION = Size 4<br />Company A<br />Price today x # of shares bought<br />Company A<br />Price today x # of shares bought<br />Company A<br />Price today x # of shares bought<br />TOTAL EARNINGS = _____<br />
  43. 43. HOMEWORK<br />Tom: 2 pcs, 5x8 or ½ index cards (with or without notes yet)<br />USB (clean) with video<br />CD (with names) with video<br />Whoever’s bringing the USB for your group should come to class by 7:20am.<br />

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