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Understanding Financial Markets

Online- Course Description

Intro- The importance of Umbrellas                                                                                 6.15 min

A unique and entertaining examination of free markets made from contrasting two different approaches to the New York City umbrella crisis; Tim provides a fascinating view of how a free market provides a solution to the problems faced by rain-drenched New Yorkers.


Module 1    Understanding Free Market Solutions                                                         19.46 min


A discussion of the evolution of trade, the free market system and the non-violent solutions that they represent;  an interesting comparison of the financial system to the legal system; an analysis of the essential elements of a free market;  an example of an attempt to bypass free markets by setting price.


Module II     Free Trade and Currency Rates                                                                  11.46 min


A visit to an island in an effort to provide an introduction to international trade; the benefits, and obstacles;  the role of foreign exchange rates.


Module III    Foreign Exchange and The Bretton Woods Experiment                          18.58 min


Case Study (Part One): An analysis of the Bretton Woods system of fixed exchange rates; its objectives and mechanics; its reliance on international coordination of fiscal and monetary policy; the role of the dollar as a reserve currency; the role of gold and central banks.


Module IV    The Importance of Consistency: Fiscal, Monetary and Exchange Rate Policy      32:15 min

Case Study (Part Two): A look at debt, deficits and the role played by the legislative and executive branches of government; monetary policy, money creation, inflation and capital flows and Treasury auctions; the impact of inconsistent policies on inflation, trade, economic activity; the factors leading to the demise of Bretton Woods; Nominal versus real interest rates.


Module V   Regulating Interest Rates – Setting the Price of Money                              18.58 min

Case Study (Part Three):  An analysis of unintended consequences of ignoring the supply/demand equilibrium; the S&L crisis, the impact on the banking system and the mortgage market, and the need for the Volker Rescue Package.


Module VI   Return to a Market-Driven Environment                                                    18.13 min

Case Study (Part Four): The Dollar Rescue Package, The Kaufman Scenario; a discussion of global capital flows resulting from changes in the economic environment; the impact on interest rates, exchange rates and economic activity; the transfer payment from manipulating exchange rates and the impact of a weak or strong currency.


Module VII    Foreign Exchange Markets and FOREX                                                 31.06 min

An introduction to the global foreign currency markets; the players, venues and terms; a description of the typical types of trades, financing components; the relationship to international interest rate money markets; the leverage deployed as compared to other financial markets.


Module VIII   Negotiable Instruments and Credit Spreads                                            14.25 min

The concept of negotiability in fixed-income markets; bank assets and liabilities defined; an explanation of the inverse relationship between yields and prices;  US Treasuries as a benchmark, and the tiers of credit spreads;  present value calculations and securitization.


Module IX     Forward Markets and Pricing – The Path to Derivatives                        22.29 min

An introduction to the yield curve; constructing an interest rate hedge through the use of a forward/forward versus a money market derivative; deconstructing the yield curve; isolating interest rate risk; a discussion of the various types of risks, credit, performance, settlements; the concept of balance sheet bloat and ROA; moving a hedge off the balance sheet.


Module X    An introduction to Futures                                                                           20.07 min

An introduction to cash market and exchange traded futures;  the role of the clearinghouse; initial and variation margin; money market and forex futures; dealing with credit in cash and futures markets; insuring against performance risk.


Module XI   An introduction to Options                                                                          34.31 min

Tim introduces us to financial options through the use of an amusing story complete with a dog, an entrepreneur and a quick-witted widow; An examination of the non-linear aspect of options; an explanation of terms and properties; uses of options for taking, shedding and managing risk; the interest rate component of options, conversions and reverse conversions, covered and naked options and other uses of options as strategic instruments.


Module XII   An Introduction to Swaps                                                                           14.58 min

The flexibility of swaps is examined with an example of how a small, liability-driven community bank uses a plain vanilla fixed/floating LIBOR swap to hedge the interest rate risk in a three year loan; Credit default swaps (CDS) are discussed as a method of shifting or reducing credit risk.


Module XIII   An introduction to Risk Management and Asset Liability Management (ALM)                                                                                                                                                18.20 min

The interest rate risk-management process for a bank’s balance sheet is discussed; Tim presents a wry and, at times, hilarious, view of a bank’s balance sheet management process by describing a typical Asset/Liability Committee (ALCO) meeting; the internal issues surrounding the process, the competitive factors driving the positions on the opposite sides of the balance sheet; the marginal cost of funds, RAROC and V@R; the delicate position of the risk manager.

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