Syllabus for Course Finance 3000 Hawaii Pacific University • Professor: Dr. Gunter Meissner, Business: 544 0807, Office: FHT 5th floor #1 • E-mail: firstname.lastname@example.org, Web: www.dersoft.com • Contents: The course focuses on three main issues: • a) Basics of Finance • b) Asset management • c) Debt Management Goals: a) The student will be familiar with basic financial concepts such as the Time value of money concept,Capital Budgeting (Investment decision process) and Working capital management. b) Asset management: In the field of asset management every student will be a competent fund manager and financial adviser at the end of the semester. The student will learn about the two major investments: Bonds and stocks. The student will know how to apply the latest concepts and strategies of trading.
Syllabus for Course Finance 3000 cont. • c)Debt management: • In the field of debt management the student will be familiar with the classical types of liabilities of a company (stocks, bonds, loans). Also, the student will learn how to use financial innovations such as interest rate and currency swaps, caps, floors, dual-currency bonds and convertibles in order to reduce cost and the various types of risk. • Literature: 1) Slides on www.dersoft.com/hpu • 2) Essentials of Corporate Finance, Ross, Westerfield, Jordan • 3) Trading Financial Derivatives, Gunter Meissner • 4) Outperform the Dow: Using Options, Futures and Portfolio Strategies to Beat the Market, Gunter Meissner • 5) Credit Derivatives : Application, Pricing, and Risk Management, • Gunter Meissner(will be used for Risk Management) • 6) Dictionary of Finance and Investment Terms, Downes, Goodman • 7) RISK Magazine (available at Library desk)
Grading • Grading: Participation/Homework 10% • Trading game 10% • Financial paper 20% • Presentation of Financial Paper 10% • Mid-Term 25% • Final 25% Point System 95.00 =< A =< 100 90.00 =< A- < 95.00 86.66 =< B+ < 90.00 83.33 =< B < 86.66 80.00 =< B- < 83.33 76.66 =< C+ < 80.00 73.33 =< C < 76.66 70.00 =< C- < 73.33 65.00 =< D+ < 70.00 60.00 =< D < 65.00 F < 60.00
Syllabus for Course Finance 3000 cont. Permanent homework: Read, listen to financial news!! Bring questions to class! Financial paper: Each student will write a 10 page paper and present it leading a 30 minute discussion on his/her findings. The paper has to be handed in one week before presentation. APA style, have a Table of Contents, have a Conclusion! The paper has to show your own thought process ! Don’t cite too much, but analyze ! The quality of the argument is important, not the argument itself !
Finance as a Science Soft Sciences • Marketing • Management • Communication These sciences use Psychology, Sociology and common sense to solve problems; there is usually a “probably better” or “probably worse” Hard Sciences • Math/Statistics • CS/IT • Nature Sciences (Physics, Chemistry, Astrophysics Gene Technology) These sciences use Math, Logic and Computers to solve problems; there is usually a “right “ or “wrong” Finance • Time Value of Money Concept •Corporate Finance • Stock/Bond Analysis • Portfolio Theory (CAPM) • Derivatives (Futures, Swaps,Options) • Risk Management •Accounting • Behavioral Finance • Investments
Should we learn Finance? Of course!!!! Why should we learn Finance??
Topics for financial paper 1)Analysis of the financial system of a certain country, especially the exchange 2) The American Bond Market: History (Junk Bonds in the 80’s to today), Types of Bonds (Plain vanilla, floater…), Correlation of major Bond markets 3) Bond theory: Rate of return, Duration, Convexity, Bond stripping 4) The American stock market, History (1929 to today), Correlation to other major markets Perspective, where does it go? 5)Stock analyses, P/E ratio, dividend yield, certificate, dividends, buybacks, stock splits, 6) World stock indices, Dow, Nasdaq, S&P, NYSE, Russel 2000, Dax , Nikkei, FTSE, Hang-Seng, Indices of Emerging Markets, (B-share, Bolsa…), Correlation! Perspective 7) World commodity markets, Overview, indices (CRB), recent developments, Outlook - which one’s to buy 8) CAPM, Theory, Implication, Practical relevance today? 9) Monetary policy in the US, Instruments, Usage, Success 10) European Monetary Union, Too early?, too unprepared?
Topics for financial paper cont. 11) Balance sheet of a company, Structure and Contents, Valuable for a potential investor? How to improve it 12) Hong-Kong July 1, 1997, One country - Two systems, Status quo analyses - Outlook 13)Economic indicators: NAPM, CPI, PPI, initial jobless claims, employment cost index (ECI), non-farm payrolls, unemployment, GDP, consumer confidence, beige book 14) Mergermania – A threat to the capitalistic system? 15) Swaps – Theory and Practice 16)Convertibles – Types and Pricing 17) Dividend Policy – Effects on the stock price 18) The World bank and the IMF – Structure and Goals 19) Insider Trading 20) Technical Analysis – Trick or Treat 21) Capital gains tax in the USA 22) Mortgage backed securities in the USA
Topics for financial paper cont. 23) Mutual funds – Buy the one that has performed best? 25) Futures - Practical application and pricing 26) Options - Practical application and pricing 27) Programming the Black-Scholes model or binomial option pricing model 28) US Retirement Tools: IRA’s and 401K’s 29) The Asian financial crises part 2 – Impact on the US and world economy with a time lag? 30) Business cycles – Obsolete? 31) The Japanese economy: solutions to a 10-year recession 32) The Hawaiian economy: solutions to a 10-year ailing economy 33) Forecasting methodologies for stocks; an overview 34) Chapter 11 bankruptcy protection 35) Working capital management 36) Mergers and Aquisitions
Topics for financial paper cont. 37) Foreclosures, A sure bet? 38) Finance and Neural Networks 39) Finance and Fuzzy Logic 40) Finance and Chaos Theory 41) Derivatives: Curse or Blessing for Society ? 42) Internet IPO’s: A sure bet for professionals ? 43) Has the Fed done a good job lately? 44) Technical Analysis: An empirical test 45) US Retirement Plans (IRA’s and 401 K’s) 46) Do Stocks outperform Bonds in the long run? 47) Is the US sliding into a recession? 48) Day-trading – Only for Professionals? 49) E-Banking and E-Trading – Pros and Cons 50) Can international market correlations be exploited by traders? 51) Do Intra-day trends exist, that can be exploited by traders? 52) Collateralized Debt Obligations (CDO’s) – Pros and Cons
Topics for financial paper cont. 53) How to write a Business Plan – Write a detailed plan for your own company 54) Buy outs – Types, Pros Cons, Success rates 55) Are Bond Prices and Stock Prices positively or negatively correlated? 56) Are Stock Prices and Volatility negatively correlated? 57) Does an Increase in Volatility indicate an Market Reversal? 58) Does the Internet reduce company's cost of capital? 59) Will the Internet make Brokers obsolete? 60) Venture Capital: A Good Investment? 61) Malaysia’s Lesson from the Asian Financial Crisis: Should we ignore help from the IMF? 62) Bush’s Anti Missile Shield: Technologically and financially ridiculous? 63) Credit Derivatives: What are they, what are they good for? 64) Where is the value in Behavioral Finance? 65) Investing in Hedge Funds – Too risky? 66) The Tobin tax – Can it decrease currency speculation and volatility? 67) Choose your own topic
Topics for financial paper cont. 68) The recent accounting scandals – What happened, what has to be done? 69) The Enron – Arthur Anderson saga – What went wrong? Lessons to learn 70) The WorldCom accounting scandal 71) The Value at Risk concept 72) Basel II – The BIS proposal to banking supervision 73) Corporate Risk Management: Market Risk, Credit Risk, Operational Risk 74) Credit Derivatives – An Overview 75) Credit Risk Management 76) A survey of credit risk vendors 77) Operational Risk – The next generation 78) Pricing Credit Derivatives (Chapter 5 in Meissner’s book) 79) Investing in ETFs – A good idea? What are the costs? 80) The Daimler-Chrysler Merger - A success story? The $275 million lawsuit 81) Dell’s direct sales strategy – The model of the future?
Topics for financial paper cont. 82) CEO and executive management compensation - Just a disgrace or harmful for shareholder value? Should there be a cap? 83) Is the stock market crash over? Prediction for the future! 84) The US credit score - How is it derived, Is there to much emphasis on it? 85) The target Fed Funds rate – How does it exactly work? 86) The US bankruptcy law – Too lenient? 87) The Sarbanes-Oxley Compliance Solution – Pros and Cons 88) The US Double Deficit – A Danger for International Financial Markets? 89) Should China float its Yuan? 90) Hedge Funds – What are their main strategies? Should they be regulated? 91) Market Timing – How does it exactly work? Should it be restricted? 92) Reits – Invest now? 93) The US corporate tax law – Favoring the big? 94) Martha Stuart – Wrongfully Convicted?
Topics for financial paper cont. 95) Bondstripping – How does it work? 96) The weak dollar – Curse or Blessing for the US economy? 97) Nanotechnology stocks – A good investment? 98) The EU expansion to 25 states – Chaos in the making? 99) Robert Engle’s 2003 Nobel-Prize rewarded GARCH theory – Justified? 100) Volatility on Volatility – A good trading indicator? 101) “Mexifornia” - Should illegal immigrants receive the green card? 102) Microsoft – A falling giant? 103) A Model for a Fair Exchange Rate 104) A Fundamental Analysis Model to forecast stock prices 105) Fannie Mae and Freddy Mac – Too much profit, too little benefit for mortgagors? Should they be privatized? 106) Should stock options be expensed? 107) Kmart – Sears, Another Failed Merger? 108) Hedgestreet – Derivatives for the small investor. A useful tool?
Topics for financial paper cont. 109) Stock market forecast for the next year 110) Fundamental and Technical Analysis of the Hawaii’s “Big Four” 111) High-Tech in Hawaii – An Analysis of Kamakura Corporation www.kamakuraco.com 112) An Analysis and Improvement of Kamakura’s ‘Technical Report’ 113) IBM selling its PC division to Lenovo – A good idea? 114) The Shareholder Value Concept – Outdated, Too shortsighted? 115) Is Management Compensation in the US too high? – Should there be a Cap? 116) Hyundai –Currently number 7, soon number 1? 117) Walmart, 2% of US GDP – Success by employee discrimination? 118) The Boeing –Airbus Battle, No chance for Boeing? 119) The IPO process – Unfair? Corrupt? 120) How are Stock prices and Bond prices correlated? An empirical Study 121) A Model for a Fair Stock Price – Combining fundamental and technical analysis 122) Are we in the middle of a housing bubble, which will pop soon?
Topics for financial paper cont. 123) Investible Hedge Fund Indexes – Where do we stand? 124) GM and Ford – What to do to fight Asia and Europe? 125) Do markets bottom and top on high volatility? 126) Private Equity Firms – Course or Blessing for the Economy? 127) Islamic Law (Shari’ah) – Opportunities and Challenges 128) Can we exploit the downturn during the earnings warning season? 129) Should GM merge with Nissan-Renault? 130) Ethics in Finance – Is there any? Choose your own topic, preferably finance related!!
Jobs Jobs Jobs MBA FINANCE Banking (Trader, Marketer, Manager, Sales, CFA) CFP Treasury Department of any Company (CFO, CRO, FRM) Commercial Bank Investment Bank / Brokerage House Generally: Don’t study on easy street!!!
To be Successful on the Job: Stay single !!! Experience Emotional Intelligence Intelligence/ Knowledge • Self-awareness (realize how you come across) • Self-regulation (suspend a decision, analyze first) • Sensitivity (cultural; sense emotional problems) • Motivation / Ambition (work smart and work hard) • Social Skills (Communication, Team-skill, Persuasiveness)
Who manages Money??? Economic Unions EU, Nafta, Asean Individuals Companies Countries Reasons: Debt Reasons: Assets Recorded on a
Start of new Bear Market, March 2000 Bear Market Bull Market Bear Market Bull Market Bear Black Monday 1987 1973 and 1978 OPEC Crises Post War Growth Great Depression Conclusion:
The Dow from 1928 to today Conclusion:
Comparing the Major Indices Conclusion:
Trading in the New Millenium Broker versus Trader What we trade When we trade Where we trade How trades are executed What we do Criteria of good trader How we trade • Fundamental analysis • Technical analyses • Seasons • Intuition (Book chapter 2)
Broker versus Trader What is a broker? A broker is a person who invests your money until is gone (Woody Allan) A broker is an There are interbank brokers: Trader at Bank A (Buyer) Broker Trader at Bank B (Seller) There are “private investor” brokers Private Investor A Broker Exchange Who takes price risk??
Investment Products Mutual Funds are About of all mutual fund managers underperform their benchmark!!! Why????
General Reason: Specific Reasons:
Investment Products What about Hedge Fund or Fund of Funds performance?? Difficult to know.. Performance results suffer from ‘survivorship bias’ and ‘reporting bias’ (also called backfill bias)
Investment Products Considering the mutual fund performance disaster, what shall we do ? Invest passively in as QQQQ, SPY, DIA, etc or (Holding company depositary receipts) as BBH (Biotech), Internet (HHH) or UTH (Utilities) etc
Where we trade • on an exchange • OTC (over the counter) (Book p.10,11)
How trades are executed • Open outcry • Electronically (Book p.13,14)
On-line Trading First step: To trade: Execution of the trade: The broker checks the order (in terms of size and price) and puts it into the pit or computerized trading system The execution of the trade is displayed on your computer screen
On-line Trading, cont. Advantages of On-line trading: Disadvantages of On-line trading:
Open Outcry Exchange Pit Seat Pit Pit Hawaii Book p.13
Computerized Trading (as the NASDAQ) AMZN Bid Size Offer Size $ 99 300 $ 96 250 $ 94 50 $ 91 100 $ 90 200 $ 88 3000 Book p.13
Computerized Trading (as the NASDAQ) AMZN Bid Size Offer Size $ 99 300 $ 96 250 $ 94 50 $ 91 100 $ 90 200 $ 88 3000 Book p.13
Computerized Trading (as the NASDAQ) “Level 2” trading allows an investor to see an ECN (Electronic Communication Network) screen
What we do • Speculate • Arbitrage • Hedge (Book p.5,6,9)
More on Speculation Difference Gambling - Speculation - Investing The chances of winning when gambling are Example: Exception: The chances of winning when speculating are In contrary to speculation,investing is
More on Speculation These days, speculation is done ON MARGIN This means Example: An investor wants to buy Yahoo, which trades at $100. He buys it on margin, which is 40%, and only pays The same logic applies to short selling. Short selling is Warning: Only speculate with money you can afford to lose
More on Arbitrage Example: Two traders quote the following prices for 1oz of Gold Tokyo Bid Offer London Bid Offer Is arbitrage possible? The term Arbitrage is often deliberately misused as in “Risk-Arbitrage = Take-over Arbitrage” or “Interest rate Arbitrage = Yield curve Arbitrage”
Criteria of a good trader (Book p.15,16)
The Philosophy of Stock Price Forecasting Forecast Possible: No Forecast Possible: The markets are “efficient”= All information about a stock is incorporated in the current stock price. This is equivalent to the “Random Walk Hypothesis”= • Fundamental Analysis • Technical Analysis • Seasonalities • Times Series Analysis • Neural Networks • Chaos Theory • Econometric Models (“Outperform the Dow” Book chapter 2)
How we trade trading are decisions based on • Fundamental analysis • Technical analyses • Seasons • Intuition (Book p.16,17)
Fundamental analysis Fundamental analysis is trying to forecast the movement of a stock price based on political, economical, sector-specific and company-specific data. • Political stability is essential • Macro-economicdata are to be analyzed • Sector is of importance • Company specific data are crucial (Book p.16,17)
Financial Ratios An Overview of Popular Financial Ratios 1) Earnings Ratios PE Ratio = Market Price / Earnings per Share (will be discussed) PEG Ratio = Market Price / Earnings per Share / Growth Rate (will be discussed) (will be discussed) Earnings per Share = Earnings / Number of Outstanding Stock (will be discussed) Dividend Yield = (Annual) Paid Dividend / Current Market Price 2) Liquidity Ratios Current Ratio = Total Current Assets / Total Current Liabilities Net Working Capital = Total Current Assets - Total Current Liabilities Cash Flow = (Cash +Marketable Securities) / Total Current Liabilities
Financial Ratios An Overview of Popular Financial Ratios 3) Profitability Ratios (will be discussed) Return On Equity = Earnings / Net Worth of Company1) Operating Profit Margin = Operating Income / Net Sales Net Profit Margin = Net Income / Net Sales Book Value = Net worth of company1) / Number of outstanding stock 4) Capitalization Ratios Debt-to-Equity Ratio (also called leverage) = (Bonds + Preferred Stock) / Net Worth of Company 1) 1) The Net Worth of a company = Shareholders Equity = Total Current Assets – Total Current Liabilities
Earnings ratios One of the most important ratios is the price-earnings ratio, PE The PE is the price of the stock divided by the earnings per share of the company. The earnings in the PE ratio can be trailing, current or expected. If the company is healthy and earnings are growing, the trailing PE ratio is higher than the current PE ratio, which is again higher than the expected (also called forward) PE ratio. The PE, which is published in newspapers and on screens, is usually the expected PE. As an example, if the stock of a company trades at $100 and next years expected earnings per share is $5, then the expected PE ratio is Result:
Earnings ratios A fairly new ratio is the Price Earnings Growth ratio, PEG It is the PE ratio divided by next years expected growth rate: Example: The price of IBM is $100, the earnings per share is $2, And the next years expected growth rate is 50 (%). What is the PEG ratio? PEG ratios below 1 are considered fairly cheap, PEG’s of over 1 are considered fairly expensive