Finance Theory

Finance Theory

ref: https://ocw.mit.edu/courses/15-401-finance-theory-i-fall-2008/resources/

Ses 1 - Introduction

Challenges of Finance:

1. valuation of assets
2. management of assets

The framework of Financial Analysis:

1. Accounting: the language of finance

   1. stock
   2. flow(derivative)

2. Balance Sheet and Income Statement Perspectives

   1. Balance Sheet(资产负债表): snapshot of financial status quo(stock): Financial status

   2. Income statement: snapshot of change of the status quo(flow): Financial decisions

      

3. Corporate financial decisions - cash flow in corporation

   

   

4. Personal Financial Decisions - cash flow in person
   

Time and Risk
comes up with modern economics

Six Fundamental Principles of Finance

1. There is no such thing as a free lunch
2. Other things equal, individuals:
   1. prefer more money than less(non-satiation)
   2. prefer money now to later(impatience)
   3. prefer to avoid risk (risk aversion)
3. All agents act to further their own self-interest.
4. Financial Market Prices Shift to Equalize Supply and Demand
5. Financial Markets Are Highly Adaptive and Competitive
6. Risk-Sharing and Frictions Are Central to Financial Innovation

We should pull the knowledge from other into ourself.(that means you should know what are you eager for)

Ses 2 - Present Value Relations

CashFlows and Asset

An interesting sentence make me shocked:

An Asset is a Sequence of current and future Cashflows.

Asset_t = {CF_t, CF_t+1, CF_t+2, ...}

Value of Asset:
Always draw a timeline to visualize the timing of cashflows.