Blockchain and FinTech - Lecture 1 Courses 2022
Blockchain and FinTech - Lecture 1 Courses 2022
Deal?
Traditional Financial Markets
• Why do the financial markets exist?
Before transaction;
Adverse Selection: a borrower with adverse credit is more
actively search a loan and more likely to get it!
After transaction;
Moral Hazard: a risk (hazard) that the borrower engages in
activities undesirable (immoral) to the lender.
Overviews
• Major Financial Intermediaries
Depository institutions (Banks):
Commercial banks, saving and loan associations, credit
unions
Contractual savings institutions:
Insurance companies, pension and retirement funds
Investment institutions:
Finance companies, Mutual Funds, and Money-market funds
Commercial Banks
• Collect Deposits
• Grant loans
• To individuals (Retail banking)
• To companies (Corporate banking)
• Handle payments
• Heavily Regulated
Balance Sheet
of a Bank
• Total assets = total liabilities + capital
Diversifying:
Do NOT put all your eggs in one Basket!
• 28% of the U.S. stock market and almost 44% of all U.S. households hold stock via
mutual funds.
• Assets held by global mutual funds have grown by about 17% per year for the last
25 years, reaching over $40 trillion in 2017.
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Money Market Mutual Funds
Global Mutual Funds
Hedge Fund
Source: Adapted from I. Lee, S. Lochhead, J. Ritter, and Q. Zhao, “The Costs of Raising
Capital,” Journal of Financial Research 19(1) (1996): 59–74.
Largest U.S. IPOs
Top Global IPO Underwriters, Ranked by 2014 Proceeds
Investment Bank
• Equity Sales: when a firm sells an entire division (or
maybe the entire company), enlisting the aid of an
investment banker.
─Assists in determining the value of the division or firm and
find potential buyers
─Develop confidential financial statements for the division
for prospective buyer (confidential memorandum)
─Prepare a letter of intent to continue, assist with due
diligence, and help reach a definitive agreement
Investment Bank
• Merger and Acquisition (M&A):
• Investment bankers may assist both acquiring firms and
potential targets
• Investment bankers will assist in all areas, including deal
specifics, lining up financing, legal issues, etc.
Securities Dealers and Brokers
Some videos:
http://www.investopedia.com/video/play/retail-banking/
http://www.investopedia.com/video/play/investment-banking/
http://www.investopedia.com/video/play/commercial-bank/
http://www.investopedia.com/video/play/what-are-hedge-funds/
http://www.investopedia.com/video/play/introduction-mutual-funds/
http://www.investopedia.com/video/play/financial-intermediary/
Central Bank (CB)
• Central banks are the government authorities in
charge of monetary policy (and fiscal policy).
• In the U.S., the Federal Reserve System (Fed).
• In Europe, the ECB and individual countries central banks.
• Although we typically hear about central banks in
connection with interest rates, their actions also
affect credit, the money supply, and inflation among
others.
Central Bank
• Two competing theories try to explain the observed
behavior of central banks:
─Public Interest View: the central bank serves the public
interest.
─Theory of Bureaucratic Behavior: the central bank will seek
to maximize its own welfare.
European Central Bank (ECB)
• http://www.investopedia.com/video/play/monetary-policy/
• Goals:
─High employment
─ Want demand = supply, or natural rate of unemployment
─Economic growth (natural rate of output)
─Stability of financial markets
─Interest-rate stability
─Foreign exchange market stability
• Goals are often in conflict
Lessons from
the Global Financial Crisis
How Much?
Financial Statements
Source of Finance
Equity and Bond
Or borrowing from
financial intermediaries
58
Financial Risk
• Uncertainty: There is some probability that we do not achieve the
target or the conditions change
The higher probability of deviating from the target, the more risk
The more deviation from the out come, the more risk
Financial Risk Management Products
• Derivative: an instrument whose value depends on, or is derived
from, the value of another asset.
• Derivatives include futures, forwards, swaps, options, etc.
• Why Derivatives? a key to transfer financial risks
• The underlying assets include stocks, currencies, interest rates,
commodities, debt instruments, electricity, insurance payouts, the
weather (20% of the US economy – Nowadays we can trade
Temperature as a commodity), etc.
Example: Futures on Milk Price
• Profit of Company A:
• Production cost of 1 liter of milk= €0.80
• Optimal sale price of 1 liter of milk= €1.00
• Total production of milk= 10000 lit
• Total Profit=
• Profit of Company B:
• Production cost of 1 ice cream = €1.40
• 0.5 lit of milk= €0.50
• Other costs= €0.90
• Optimal sale price of 1 ice cream = €1.50
• Total production of ice cream = 20000 unit
• Total consumption of milk= (20000*0.5=) 10000 liter
• Total Profit=
Ex: Higher Milk Price
• Milk price goes up to 1.30 €/lit
• Profit of Company A:
• Total Profit=
• Profit of Company B:
• Production cost of 1 ice cream = €1.55
• 0.50 lit of milk= €0.65
• Other costs= €0.90
• Total Profit=
Ex: Lower Milk Price
• Milk price goes down to 0.70 €/lit
• Profit of Company A:
• Total Profit=
• Profit of Company B:
• Production cost of 1 ice cream = €1.25
• 0.50 lit of milk= €0.35
• Other costs= €0.90
• Total Profit=
Example: Futures on Milk Price
• http://www.investopedia.com/terms/s/shadow-banking-system.asp
Financial Innovation and the
Decline in Traditional Banking
FinTech (Financial Technology)
AI, Big Data, ML, and Blockchain
• Revolution in financial service industry
• Using information and mobile
technologies
• Reduce costs and time
• Improve services:
• Big Data, Risk Management and Analytics
(to understand consumer spending habits
and market predictions)
• Payments and Money Transfer
• Insurance
• Open Banking
• Crowdfunding and Peer-to-Peer lending
• Trade Finance
• Wealth management and Investment
(Robo-advisers)
Top FinTechs
• Top 50 in Europe:
https://thefintech50.com/the-fintech50-2020
• Top 50 innovative:
https://www.forbes.com/fintech/2021/#352ac5b331a6