Professional Documents
Culture Documents
Contents
1
Main article
1.1
Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.1
Areas of nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.2
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.3
Financial theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.4
Professional qualications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.5
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.6
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1.7
External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1
Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.2
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.3
2.1.4
Investment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.5
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.6
2.1.7
Financial crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.8
Market share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.9
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.1.10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10
10
10
Personal nance
11
3.1
Personal nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
3.1.1
11
3.1.2
Areas of focus
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
3.1.3
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
3.1.4
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
3.1.5
Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
3.1.6
External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
ii
4
CONTENTS
Corporate nance
13
4.1
Corporate nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
4.1.1
13
4.1.2
Capital structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14
4.1.3
15
4.1.4
Dividend policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
4.1.5
17
4.1.6
18
4.1.7
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
4.1.8
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
4.1.9
Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
4.1.10 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
Financial capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
4.2.1
21
4.2.2
Sources of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
4.2.3
22
4.2.4
Fixed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
4.2.5
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
4.2.6
Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
4.2.7
23
4.2.8
23
4.2.9
24
24
4.2.11 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
24
24
4.2.14 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
4.2.15 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
25
4.3.1
Historical examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
4.3.2
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
4.4.1
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27
4.4.2
Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
4.4.3
Societal eects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
4.4.4
31
4.4.5
Types of insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
4.4.6
Insurance companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39
4.4.7
41
4.4.8
Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
4.4.9
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
4.2
4.3
4.4
CONTENTS
iii
4.4.10 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
4.4.11 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
47
Risk Management
48
5.1
Derivative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
5.1.1
48
5.1.2
48
5.1.3
Forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
5.1.4
Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
5.1.5
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
5.1.6
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
5.1.7
Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
5.1.8
51
5.1.9
Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
52
5.1.11 Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
5.1.12 Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
55
5.1.14 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
5.1.15 Criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
57
5.1.17 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
60
60
5.1.20 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
63
63
Finance of states
64
6.1
Public nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
6.1.1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
6.1.2
64
6.1.3
Government expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
6.1.4
65
6.1.5
67
6.1.6
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
6.1.7
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
6.1.8
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69
6.1.9
External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
Financial economics
71
iv
CONTENTS
7.1
Financial economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
7.1.1
Underlying economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71
7.1.2
Resultant models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
7.1.3
Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
7.1.4
74
7.1.5
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
7.1.6
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
7.1.7
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76
7.1.8
External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
Financial mathematics
80
8.1
Financial mathematics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
8.1.1
History: Q versus P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
8.1.2
Criticism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
8.1.3
82
8.1.4
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
8.1.5
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
8.1.6
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
Experimental nance
83
9.1
Experimental nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
9.1.1
History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
9.1.2
Scientic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
9.1.3
Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83
9.1.4
Types of experiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
9.1.5
Main ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
9.1.6
See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
9.1.7
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
9.1.8
External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85
10 Behavioral nance
86
86
10.1.1 Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
10.1.2 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
10.1.3 Criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90
91
92
10.1.6 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92
10.1.7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
94
96
96
CONTENTS
96
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96
97
97
97
11.1.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
97
98
98
Chapter 1
Main article
1.1 Finance
1.1.1
Areas of nance
2. Adequate protection: the analysis of how to protect a household from unforeseen risks. These risks
can be divided into liability, property, death, disability, health and long term care. Some of these
risks may be self-insurable, while most will require
the purchase of an insurance contract. Determining
how much insurance to get, at the most cost eective
terms requires knowledge of the market for personal
insurance. Business owners, professionals, athletes
Personal nance
Main article: Personal nance
Questions in personal nance revolve around:
1
1.1. FINANCE
sive hedging strategy
Measure the portfolio performance
Financial management overlaps with the nancial function of the Accounting profession. However, nancial accounting is the reporting of historical nancial information, while nancial management is concerned with the
allocation of capital resources to increase a rms value
to the shareholders and increase their rate of return on
the investments.
Financial risk management, an element of corporate nance, is the practice of creating and protecting economic
value in a rm by using nancial instruments to manage exposure to risk, particularly credit risk and market
risk. (Other risk types include Foreign exchange, Shape,
Volatility, Sector, liquidity, Ination risks, etc.) It focuses
on when and how to hedge using nancial instruments;
in this sense it overlaps with nancial engineering. Similar to general risk management, nancial risk management requires identifying its sources, measuring it (see:
Risk measure: Well known risk measures), and formulating plans to address these, and can be qualitative and
quantitative. In the banking sector worldwide, the Basel
Accords are generally adopted by internationally active
banks for tracking, reporting and exposing operational,
credit and market risks.
3
management and includes analysis related to the use and
acquisition of funds for the enterprise.
In corporate nance, a companys capital structure is the
total mix of nancing methods it uses to raise funds. One
method is debt nancing, which includes bank loans and
bond sales. Another method is equity nancing - the sale
of stock by a company to investors, the original shareholders (they own a portion of the business) of a share.
Ownership of a share gives the shareholder certain contractual rights and powers, which typically include the
right to receive declared dividends and to vote the proxy
on important matters (e.g., board elections). The owners of both bonds (either government bonds or corporate
bonds) and stock (whether its preferred stock or common
stock), may be institutional investors - nancial institutions such as investment banks and pension funds or private individuals, called private investors or retail investors.
Public nance
Main article: Public nance
Public nance describes nance as related to sovereign
states and sub-national entities (states/provinces, counties, municipalities, etc.) and related public entities (e.g.
school districts) or agencies. It is concerned with:
4
A budget may be long term or short term. Long term
budgets have a time horizon of 510 years giving a vision
to the company; short term is an annual budget which is
drawn to control and operate in that particular year.
Budgets will include proposed xed asset requirements
and how these expenditures will be nanced. Capital
budgets are often adjusted annually (done every year) and
should be part of a longer-term Capital Improvements
Plan.
A cash budget is also required. The working capital requirements of a business are monitored at all times to ensure that there are sucient funds available to meet shortterm expenses.
The cash budget is basically a detailed plan that shows
all expected sources and uses of cash when it comes to
spending it appropriately. The cash budget has the following six main sections:
1. Beginning Cash Balance - contains the last pe- Economists make a number of abstract assumptions for
riods closing cash balance, in other words, the re- purposes of their analyses and predictions. They genermaining cash from last years earnings.
ally regard nancial markets that function for the nan2. Cash collections - includes all expected cash re- cial system as an ecient mechanism (Ecient-market
markets are subject to huceipts (all sources of cash for the period considered, hypothesis). Instead, nancial
[3]
man
error
and
emotion.
New
research discloses the
mainly sales)
mischaracterization of investment safety and measures of
3. Cash disbursements - lists all planned cash out- nancial products and markets so complex that their efows for the period such as dividend, excluding in- fects, especially under conditions of uncertainty, are imterest payments on short-term loans, which appear possible to predict. The study of nance is subsumed
in the nancing section. All expenses that do not under economics as nancial economics, but the scope,
aect cash ow are excluded from this list (e.g. de- speed, power relations and practices of the nancial system can uplift or cripple whole economies and the wellpreciation, amortization, etc.)
being of households, businesses and governing bodies
4. Cash excess or deciency - a function of the cash within themsometimes in a single day.
needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If Financial mathematics
total cash available is less than cash needs, a deciency exists.
Main article: Financial mathematics
5. Financing - discloses the planned borrowings and
repayments of those planned borrowings, including Financial mathematics is a eld of applied mathematinterest.
ics, concerned with nancial markets. The subject has
a close relationship with the discipline of nancial economics, which is concerned with much of the underlying
1.1.3 Financial theory
theory that is involved in nancial mathematics. Generally, mathematical nance will derive, and extend, the
Financial economics
mathematical or numerical models suggested by nancial
economics. In terms of practice, mathematical nance
Main article: Financial economics
also overlaps heavily with the eld of computational nance (also known as nancial engineering). Arguably,
Financial economics is the branch of economics study- these are largely synonymous, although the latter focuses
ing the interrelation of nancial variables, such as prices, on application, while the former focuses on modeling and
interest rates and shares, as opposed to goods and ser- derivation (see: Quantitative analyst). The eld is largely
vices. Financial economics concentrates on inuences of focused on the modelling of derivatives, although other
real economic variables on nancial ones, in contrast to important subelds include insurance mathematics and
pure nance. It centres on managing risk in the context quantitative portfolio problems. See Outline of nance:
of the nancial markets, and the resultant economic and Mathematical tools; Outline of nance: Derivatives pric-
1.1. FINANCE
ing.
Experimental nance
Main article: Experimental nance
Experimental nance aims to establish dierent market settings and environments to observe experimentally
and provide a lens through which science can analyze
agents behavior and the resulting characteristics of trading ows, information diusion and aggregation, price
setting mechanisms, and returns processes. Researchers
in experimental nance can study to what extent existing
nancial economics theory makes valid predictions and
therefore prove them, and attempt to discover new principles on which such theory can be extended and be applied to future nancial decisions. Research may proceed
by conducting trading simulations or by establishing and
studying the behavior, and the way that these people act
or react, of people in articial competitive market-like
settings.
Behavioral nance
Main article: Behavioral economics
Behavioral nance studies how the psychology of investors or managers aects nancial decisions and markets when making a decision that can impact either negatively or positive one of there areas. Behavioral nance
has grown over the last few decades to become central
and very important to nance.
Behavioral nance includes such topics as:
1. Empirical studies that demonstrate signicant deviations from classical theories.
2. Models of how psychology aects and impacts trading and prices
3. Forecasting based on these methods.
4. Studies of experimental asset markets and use of
models to forecast experiments.
A strand of behavioral nance has been dubbed Quantitative Behavioral Finance, which uses mathematical and
statistical methodology to understand behavioral biases
in conjunction with valuation. Some of this endeavor has
been led by Gunduz Caginalp (Professor of Mathematics
and Editor of Journal of Behavioral Finance during 20012004) and collaborators including Vernon Smith (2002
Nobel Laureate in Economics), David Porter, Don Balenovich, Vladimira Ilieva, Ahmet Duran). Studies by Je
Madura, Ray Sturm and others have demonstrated signicant behavioral eects in stocks and exchange traded
5
funds. Among other topics, quantitative behavioral nance studies behavioral eects together with the nonclassical assumption of the niteness of assets.
Intangible asset nance
Main article: Intangible asset nance
Intangible asset nance is the area of nance that deals
with intangible assets such as patents, trademarks, goodwill, reputation, etc.
1.1.5
See also
Outline of nance
Financial crisis of 20072010
1.1.6
References
1.1.7
External links
Chapter 2
2.1.2 Banks
2.1.1
Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at
major investment banks to execute their trades.
Custody services - the safe-keeping and processing
of the worlds securities trades and servicing the
associated portfolios. Assets under custody in the
world are approximately US$100 trillion.[4]
2.1.3
Wire transfer - where clients can send funds to in- 2.1.6 Other nancial services
ternational banks abroad.
Bank cards - include both credit cards and debit
Remittance - where clients that are migrant workers
cards.According to the Nilson Report, Bank Of
send money back to their home country.
America is the largest issuer of bank cards.
9
real-time gross settlement systems or interbank networks.
Debt resolution is a consumer service that assists individuals that have too much debt to pay o as requested, but do not want to le bankruptcy and wish
to pay o their debts owed. This debt can be accrued in various ways including but not limited to
personal loans, credit cards or in some cases merchant accounts.
10
2.1.10
References
2.1.11
Further reading
2.1.12
External links
The role of the nancial Services Sector in Expanding Economic Opportunity | A report by Christopher N. Sutton and Beth Jenkins | John F. Kennedy
School of Government | Harvard University
Chapter 3
Personal nance
3.1 Personal nance
reducing unnecessary expenses, increasing the employment income, or investing in the stock market.
1. Financial position: is concerned with understanding the personal resources available by examining
net worth and household cash ow. Net worth is a
persons balance sheet, calculated by adding up all
assets under that persons control, minus all liabilities of the household, at one point in time. Household cash ow totals up all the expected sources of
income within a year, minus all expected expenses
within the same year. From this analysis, the nancial planner can determine to what degree and in
what time the personal goals can be accomplished.
2. Adequate protection: the analysis of how to protect a household from unforeseen risks. These risks
can be divided into liability, property, death, disability, health and long-term care. Some of these
risks may be self-insurable, while most will require
the purchase of an insurance contract. Determining
how much insurance to get, at the most cost eective
terms requires knowledge of the market for personal
insurance. Business owners, professionals, athletes
12
6. Estate planning involves planning for the disposition of ones assets after death. Typically, there
is a tax due to the state or federal government at
your death. Avoiding these taxes means that more
of your assets will be distributed to your heirs. You
can leave your assets to family, friends or charitable
groups.
Debt consolidation
Equity investment
Family planning
Personal budget
Personal nances of professional American athletes
Separately managed account
Wealth management
Comparison of accounting software
3.1.4 References
[1] Personal Finance. Investopedia. Retrieved 7 April
2012.
[2] What is Personal Finance?". Practical Financial Tips.
Retrieved 7 April 2012.
[3] Financial Planning Curriculum Framework. Financial
Planning Standards Board. 2011. Retrieved 7 April 2012.
Chapter 4
Corporate nance
4.1 Corporate nance
The primary goal of nancial management is to maximize or to continually increase shareholder value. Maximizing shareholder value requires managers to be able to
balance capital funding between investments in projects
that increase the rms long term protability and sustainability, along with paying excess cash in the form of
dividends to shareholders. Managers of growth companies (i.e. rms that earn high rates of return on invested
capital) will use most of the rms capital resources and
surplus cash on investments and projects so the company
can continue to expand its business operations into the future. When companies reach maturity levels within their
industry (i.e. companies that earn approximately average
or lower returns on invested capital), managers of these
companies will use surplus cash to payout dividends to
shareholders. Managers must do an analysis to determine
the appropriate allocation of the rms capital resources
and cash surplus between projects and payouts of dividends to shareholders, as well as paying back creditor related debt.
Choosing between investment projects will be based upon
several inter-related criteria. (1) Corporate management
seeks to maximize the value of the rm by investing in
projects which yield a positive net present value when valued using an appropriate discount rate in consideration of
risk. (2) These projects must also be nanced appropriately. (3) If no growth is possible by the company and
excess cash surplus is not needed to the rm, then nancial theory suggests that management should return some
or all of the excess cash to shareholders (i.e., distribution
via dividends).
Financial management overlaps with the nancial function of the Accounting profession. However, nancial accounting is the reporting of historical nancial information, while nancial management is concerned with the
allocation of capital resources to increase a rms value
to the shareholders.
13
14
4.1.2
Capital structure
Capitalization structure
ows. Managing any potential asset liability mismatch or duration gap entails matching the assets and liabilities respectively according to maturity pattern ("Cashow matching") or duration
("immunization"); managing this relationship in the
short-term is a major function of working capital
management, as discussed below. Other techniques,
such as securitization, or hedging using interest rateor credit derivatives, are also common. See Asset liability management; Treasury management; Credit
risk; Interest rate risk.
Much of the theory here, falls under the umbrella of the
Trade-O Theory in which rms are assumed to tradeo the tax benets of debt with the bankruptcy costs of
debt when choosing how to allocate the companys resources. However economists have developed a set of
alternative theories about how managers allocate a corporations nances. One of the main alternative theories
of how rms manage their capital funds is the Pecking
Order Theory (Stewart Myers), which suggests that rms
avoid external nancing while they have internal nancing
available and avoid new equity nancing while they can
engage in new debt nancing at reasonably low interest
rates. Also, Capital structure substitution theory hypothesizes that management manipulates the capital structure such that earnings per share (EPS) are maximized.
An emerging area in nance theory is right-nancing
whereby investment banks and corporations can enhance
investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of nancing (debt or
equity) and expenditure framework within a given economy and under given market conditions. One of the more
recent innovations in this area from a theoretical point
of view is the Market timing hypothesis. This hypothesis, inspired in the behavioral nance literature, states that
rms look for the cheaper type of nancing regardless of
their current levels of internal resources, debt and equity.
Sources of capital
Further information: Security (nance)
15
16
fail to appropriately adapt the risk adjustment.[17] Manalso Option pricing approaches under Business valagement will therefore (sometimes) employ tools which
uation.
place an explicit value on these options. So, whereas in
a DCF valuation the most likely or average or scenario
specic cash ows are discounted, here the exible and Quantifying uncertainty
staged nature of the investment is modelled, and hence
all potential payos are considered. See further un- Further information: Sensitivity analysis, Scenario
der Real options valuation. The dierence between the planning and Monte Carlo methods in nance
two valuations is the value of exibility inherent in the
project.
Given the uncertainty inherent in project forecasting and
The two most common tools are Decision Tree Analysis valuation,[19][21] analysts will wish to assess the sensitivity
(DTA)[18][19] and Real options valuation (ROV);[20] they of project NPV to the various inputs (i.e. assumptions)
may often be used interchangeably:
to the DCF model. In a typical sensitivity analysis the
analyst will vary one key factor while holding all other in DTA values exibility by incorporating possible puts constant, ceteris paribus. The sensitivity of NPV to a
events (or states) and consequent management deci- change in that factor is then observed, and is calculated as
sions. (For example, a company would build a fac- a slope": NPV / factor. For example, the analyst will
tory given that demand for its product exceeded a determine NPV at various growth rates in annual revenue
certain level during the pilot-phase, and outsource as specied (usually at set increments, e.g. 10%, 5%,
production otherwise. In turn, given further de- 0%, 5%....), and then determine the sensitivity using this
mand, it would similarly expand the factory, and formula. Often, several variables may be of interest, and
maintain it otherwise. In a DCF model, by con- their various combinations produce a value-surface",[22]
trast, there is no branching each scenario must (or even a value-space",) where NPV is then a function
be modelled separately.) In the decision tree, each of several variables. See also Stress testing.
management decision in response to an event generates a branch or path which the company could Using a related technique, analysts also run scenario
follow; the probabilities of each event are deter- based forecasts of NPV. Here, a scenario comprises a
mined or specied by management. Once the tree particular outcome for economy-wide, global factors
is constructed: (1) all possible events and their re- (demand for the product, exchange rates, commodity
sultant paths are visible to management; (2) given prices, etc...) as well as for company-specic factors (unit
this knowledge of the events that could follow, and costs, etc...). As an example, the analyst may specify
assuming rational decision making, management various revenue growth scenarios (e.g. 0% for Worst
chooses the branches (i.e. actions) corresponding to Case, 10% for Likely Case and 20% for Best Case),
the highest value path probability weighted; (3) this where all key inputs are adjusted so as to be consistent
path is then taken as representative of project value. with the growth assumptions, and calculate the NPV for
each. Note that for scenario based analysis, the various
See Decision theory#Choice under uncertainty.
combinations of inputs must be internally consistent (see
ROV is usually used when the value of a project discussion at Financial modeling), whereas for the senis contingent on the value of some other asset or sitivity approach these need not be so. An application
underlying variable. (For example, the viability of of this methodology is to determine an "unbiased" NPV,
a mining project is contingent on the price of gold; where management determines a (subjective) probabilif the price is too low, management will abandon ity for each scenario the NPV for the project is then
the mining rights, if suciently high, management the probability-weighted average of the various scenarios;
will develop the ore body. Again, a DCF valuation see First Chicago Method. (See also rNPV, where cash
would capture only one of these outcomes.) Here: ows, as opposed to scenarios, are probability-weighted.)
(1) using nancial option theory as a framework, the
decision to be taken is identied as corresponding to
either a call option or a put option; (2) an appropriate valuation technique is then employed usually
a variant on the Binomial options model or a bespoke simulation model, while Black Scholes type
formulae are used less often; see Contingent claim
valuation. (3) The true value of the project is then
the NPV of the most likely scenario plus the option value. (Real options in corporate nance were
rst discussed by Stewart Myers in 1977; viewing
corporate strategy as a series of options was originally per Timothy Luehrman, in the late 1990s.) See
A further advancement which overcomes the limitations of sensitivity and scenario analyses by examining the eects of all possible combinations of variables
and their realizations [23] is to construct stochastic[24]
or probabilistic nancial models as opposed to the
traditional static and deterministic models as above.[21]
For this purpose, the most common method is to use
Monte Carlo simulation to analyze the projects NPV.
This method was introduced to nance by David B. Hertz
in 1964, although it has only recently become common: today analysts are even able to run simulations in
spreadsheet based DCF models, typically using a riskanalysis add-in, such as @Risk or Crystal Ball. Here,
17
"growth stock", expect that the company will, almost by
denition, retain most of the excess cash surplus so as to
fund future projects internally to help increase the value
of the rm.
Management must also choose the form of the dividend
distribution, generally as cash dividends or via a share
buyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, rms
may elect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay dividends from stock rather than in cash; see Corporate
action. Financial theory suggests that the dividend policy should be set based upon the type of company and
what management determines is the best use of those dividend resources for the rm to its shareholders. As a general rule, shareholders of growth companies would prefer
managers to retain earnings and pay no dividends (use
excess cash to reinvest into the companys operations),
whereas shareholders of value or secondary stocks would
prefer the management of these companies to payout surplus earnings in the form of cash dividends when a positive return cannot be earned through the reinvestment of
undistributed earnings. A share buyback program may
be accepted when the value of the stock is greater than
the returns to be realized from the reinvestment of undistributed prots. In all instances, the appropriate dividend
policy is usually directed by that which maximizes longterm shareholder value.
Dividend policy
18
Working capital
which allows for the business to meet day to day expenses, but reduces cash holding costs.
Working capital is the amount of funds which are necessary to an organization to continue its ongoing business operations, until the rm is reimbursed through payments for the goods or services it has delivered to its
customers.[29] Working capital is measured through the
dierence between resources in cash or readily convertible into cash (Current Assets), and cash requirements
(Current Liabilities). As a result, capital resource allocations relating to working capital are always current,
i.e. short term. In addition to time horizon, working capital management diers from capital budgeting
in terms of discounting and protability considerations;
they are also reversible to some extent. (Considerations
as to Risk appetite and return targets remain identical, although some constraints such as those imposed by loan
covenants may be more relevant here).
The (short term) goals of working capital are therefore not
approached on the same basis as (long term) protability,
and working capital management applies dierent criteria
in allocating resources: the main considerations are (1)
cash ow / liquidity and (2) protability / return on capital
(of which cash ow is probably the most important).
Inventory management. Identify the level of inventory which allows for uninterrupted production
but reduces the investment in raw materials and
minimizes reordering costs and hence increases
cash ow. Note that inventory is usually the realm
of operations management: given the potential impact on cash ow, and on the balance sheet in general, nance typically gets involved in an oversight
or policing way.[31]:714 See Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Dynamic lot size model; Economic production quantity (EPQ); Economic Lot Scheduling
Problem; Inventory control problem; Safety stock.
Debtors management. There are two inter-related
roles here: Identify the appropriate credit policy, i.e.
credit terms which will attract customers, such that
any impact on cash ows and the cash conversion
cycle will be oset by increased revenue and hence
Return on Capital (or vice versa); see Discounts and
allowances. Implement appropriate Credit scoring
policies and techniques such that the risk of default
on any new business is acceptable given these criteria.
19
Management buy-out, buy-in or similar of compa- their own accounting treatment: see Hedge accounting,
nies, divisions or subsidiaries typically backed by Mark-to-market accounting, FASB 133, IAS 39.
private equity
This area is related to corporate nance in two ways.
Equity issues by companies, including the otation Firstly, rm exposure to business and market risk is a diof companies on a recognised stock exchange in or- rect result of previous capital nancial investments. Secder to raise capital for development and/or to re- ondly, both disciplines share the goal of enhancing, or
preserving, rm value. There is a fundamental debate
structure ownership
[34]
relating to Risk Management and shareholder value.
Raising capital via the issue of other forms of equity, Per the Modigliani and Miller framework, hedging is irdebt and related securities for the renancing and relevant since diversied shareholders are assumed to not
restructuring of businesses
care about rm-specic risks, whereas, on the other hand
hedging is seen to create value in that it reduces the prob Financing joint ventures, project nance, infrastruc- ability of nancial distress. A further question, is the
ture nance, public-private partnerships and privati- shareholders desire to optimize risk versus taking exposations
sure to pure risk (a risk event that only has a negative side,
Secondary equity issues, whether by means of pri- such as loss of life or limb). The debate links the value of
vate placing or further issues on a stock market, risk management in a market to the cost of bankruptcy in
especially where linked to one of the transactions that market.
listed above.
Raising debt and restructuring debt, especially when 4.1.7 See also
linked to the types of transactions listed above
Financial accounting
Financial risk management
Stock market
Security (nance)
Growth stock
Financial planning
Investment bank
Venture capital
[24][33]
Risk management
is the process of measuring risk
Financial statement analysis
and then developing and implementing strategies to manage ("hedge") that risk. Financial risk management, typ Corporate tax
ically, is focused on the impact on corporate value due
Corporate governance
to adverse changes in commodity prices, interest rates,
foreign exchange rates and stock prices (market risk). It
will also play an important role in short term cash- and Lists:
treasury management; see above. It is common for large
corporations to have risk management teams; often these
List of accounting topics
overlap with the internal audit function. While it is impractical for small rms to have a formal risk manage List of nance topics
ment function, many still apply risk management infor List of corporate nance topics
mally. See also Enterprise risk management.
List of valuation topics
The discipline typically focuses on risks that can be
hedged using traded nancial instruments, typically
derivatives; see Cash ow hedge, Foreign exchange
hedge, Financial engineering. Because company spe- 4.1.8 References
cic, "over the counter" (OTC) contracts tend to be costly
to create and monitor, derivatives that trade on well- [1] See Corporate Finance: First Principles, Aswath
Damodaran, New York University's Stern School of Busiestablished nancial markets or exchanges are often preness
ferred. These standard derivative instruments include
options, futures contracts, forward contracts, and swaps; [2] Katz, Jerey; Zimmerman, Scott. Recent Developments
the second generation exotic derivatives usually trade
in Acquisition Finance. Transaction Advisors. ISSN
OTC. Note that hedging-related transactions will attract
2329-9134.
20
[8] Preferred Stock ... generally carries no voting rights unless scheduled dividends have been omitted. Quantum
Online
[9] Drinkard, T.
[15] Aswath Damodaran: Risk Adjusted Value; Ch 5 in Strategic Risk Taking: A Framework for Risk Management.
Wharton School Publishing, 2007. ISBN 0-13-1990489
21
Jensen, Michael C.; Smith. Cliord W. The Theory of Corporate Finance: A Historical Overview. In
The Modern Theory of Corporate Finance, edited by
Michael C. Jensen and Cliord H. Smith Jr., pp. 2
20. McGraw-Hill, 1990. ISBN 0070591091
Graham, John R.; Harvey, Campbell R. (1999).
The Theory and Practice of Corporate Finance:
Evidence from the Field. AFA 2001 New Orleans; Capital exports in 2006
Duke University Working Paper.
4.1.10
Bibliography
Joo Amaro de Matos (2001). Theoretical Foundations of Corporate Finance. Princeton University Financial capital or just capital/equity in nance,
accounting and economics, is internal retained earnings
Press. ISBN 9780691087948.
generated by the entity or funds provided by lenders (and
Pascal Quiry, Yann Le Fur, Antonio Salvi, Maurizio investors) to businesses to purchase real capital equipDallochio, Pierre Vernimmen (2011). Corporate Fi- ment or services for producing new goods/services. Real
nance: Theory and Practice (3rd Edition). Wiley. capital or economic capital comprises physical goods
ISBN 978-1119975588.
that assist in the production of other goods and services,
e.g. shovels for gravediggers, sewing machines for tailors,
Stephen Ross, Randolph Westereld, Jerey Jae
or machinery and tooling for factories.
(2012). Corporate Finance (10th Edition). McgrawFinancial capital generally refers to saved-up nancial
Hill. ISBN 0078034779.
wealth, especially that used to start or maintain a busi Joel M. Stern, ed. (2003). The Revolution in Corpo- ness. A nancial concept of capital is adopted by most
rate Finance (4th Edition). Wiley-Blackwell. ISBN entities in preparing their nancial reports. Under a 9781405107815.
nancial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the
Jean Tirole (2006). The Theory of Corporate
net assets or equity of the entity. Under a physical conFinance.
Princeton University Press.
ISBN
cept of capital, such as operating capability, capital is re0691125562.
garded as the productive capacity of the entity based on,
Ivo Welch (2014). Corporate Finance (3rd Edition). for example, units of output per day. Financial capital
maintenance can be measured in either nominal monetary
ISBN 978-0-9840049-1-1.
units or units of constant purchasing power.[1][2] There
are thus three concepts of capital maintenance in terms of
International Financial Reporting Standards (IFRS): (1)
4.2 Financial capital
Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital
For a city with an important role in the world economy, maintenance in units of constant purchasing power.[1][3]
see Financial centre and Global city.
Framework for the Preparation and Presentation of FiFinancial capital is any economic resource measured in nancial Statements,
terms of money used by entrepreneurs and businesses to
buy what they need to make their products or to provide Financial capital is provided by lenders for a price:
their services to the sector of the economy upon which interest. Also see time value of money for a more detailed
their operation is based, i.e. retail, corporate, investment description of how nancial capital may be analyzed.
banking, etc.
Furthermore, nancial capital, is any liquid medium or
22
4.2.2
Sources of capital
Working capital
23
Borrowed capital
This is capital which the business borrows from institutions or people, and includes debentures:
Stage of development
Time of production
Rate of stock turnover ratio
Redeemable debentures
Irredeemable debentures
Debentures to bearer
Ordinary debentures
Seasonal consumption
bonds
Seasonal product
deposits
prot level
growth and expansion
production cycle
general nature of business
business cycle
loans
Own capital
This is capital that owners of a business (shareholders and
partners, for example) provide:
Preference shares/hybrid source of nance
Ordinary preference shares
business policies
4.2.6
Instruments
Ordinary shares
Bonus shares
Founders shares
These have preference over the equity shares. This means
the payments made to the shareholders are rst paid to the
preference shareholder(s) and then to the equity shareholders.
24
4.2.9
4.2.11 Valuation
Normally, a nancial instrument is priced accordingly to
the perception by capital market players of its expected
return and risk.
Unit of account functions may come into question if valuations of complex nancial instruments vary drastically
based on timing. The "book value", "mark-to-market"
and "mark-to-future"[8] conventions are three dierent
approaches to reconciling nancial capital value units of
account.
Capital market
Constant item purchasing power accounting
Financialization
Funding
International Financial Reporting Standards
Money supply
List of nance topics
[3] http://www.aasb.org/admin/file/content105/c9/
Framework_07-04nd.pdf
[4] Spillane, James P., Tim Hallett, and John B. Diamond.
2003. Forms of Capital and the Construction of Leadership: Instructional Leadership in Urban Elementary
Schools. Sociology of Education 76 (January): 1-17
25
If the rest of the market senses weakness, it may resist
any attempt to articially drive the market any further by
actively taking opposing positions. If the price starts to
move against the cornerer, any attempt by the cornerer to
sell would likely cause the price to drop substantially. In
such a situation, many other parties could prot from the
cornerers need to unwind the position.
4.2.15
References
F. Boldizzoni, Means and Ends: The Idea of Capital in the West, 1500-1970, New York: Palgrave
Macmillan, 2008, chapters 7-8
26
During the nancial crisis of 2007-2010 Porsche cornered the market in shares of Volkswagen, which briey
saw Volkswagen become the worlds most valuable
company.[10] Porsche claimed that its actions were intended to gain control of Volkswagen rather than to manipulate the market: in this case, while cornering the
market in Volkswagen shares, Porsche contracted with
naked shortsresulting in a short squeeze on them.[11]
1920s: The Stutz Motor Company
It was ultimately unsuccessful, leading to the resignation
of Porsches chief executive and nancial director and to
Called a forerunner of the Livermore and Cutten opera- the merger of Porsche into Volkswagen.[12]
tions of a few years later by historian Robert Sobel, the
March 1920 corner of The Stutz Motor Company is an One of the wealthiest men in Germanys industry, Adolf
committed suicide after shorting Volkswagen
example of a manipulated corner ruining everyone in- Merckle,
[13]
shares.
[4]
volved, especially its originator Allan Ryan.
1950s: The onion market
4.4. INSURANCE
27
called the insurance policy, which details the conditions
and circumstances under which the insured will be nancially compensated.
4.4.1 History
Early methods
Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as
the 3rd and 2nd millennia BC, respectively.[1] Chinese
[16] Werdigier, Julia; Creswell, Julie (July 24, 2010). merchants travelling treacherous river rapids would redisTraders Cocoa Binge Wraps Up Chocolate Market.
tribute their wares across many vessels to limit the loss
The New York Times. Retrieved July 27, 2010.
due to any single vessels capsizing. The Babylonians
developed a system which was recorded in the famous
Code of Hammurabi, c. 1750 BC, and practiced by early
4.4 Insurance
Mediterranean sailing merchants. If a merchant received
a loan to fund his shipment, he would pay the lender an
This article is about the risk management method. For additional sum in exchange for the lenders guarantee to
insurance in blackjack, see Blackjack.
cancel the loan should the shipment be stolen or lost at
sea.
Insurance is the equitable transfer of the risk of a loss,
from one entity to another in exchange for payment. It is a
form of risk management primarily used to hedge against
the risk of a contingent, uncertain loss. An insurer, or
insurance carrier, is selling the insurance; the insured, or
policyholder, is the person or entity buying the insurance
policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium.
Risk management, the practice of appraising and controlling risk, has evolved as a discrete eld of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurers promise
to compensate (indemnify) the insured in the case of a
nancial (personal) loss. The insured receives a contract,
28
Modern insurance
Insurance became far more sophisticated in
Enlightenment era Europe, and specialized varieties
developed.
4.4. INSURANCE
4.4.2
Principles
Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some
may incur. The insured entities are therefore protected
from risk for a fee, with the fee being dependent upon
the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must
meet certain characteristics. Insurance as a nancial intermediary is a commercial enterprise and a major part of
the nancial services industry, but individual entities can
also self-insure through saving money for possible future
losses.[16]
Insurability
Main article: Insurability
Risk which can be insured by private companies typically
shares seven common characteristics:[17]
1. Large number of similar exposure units: Since
insurance operates through pooling resources, the
majority of insurance policies are provided for individual members of large classes, allowing insurers
to benet from the law of large numbers in which
predicted losses are similar to the actual losses. Exceptions include Lloyds of London, which is famous
for insuring the life or health of actors, sports gures, and other famous individuals. However, all exposures will have particular dierences, which may
lead to dierent premium rates.
2. Denite loss: The loss takes place at a known time,
in a known place, and from a known cause. The classic example is death of an insured person on a life
insurance policy. Fire, automobile accidents, and
worker injuries may all easily meet this criterion.
Other types of losses may only be denite in theory. Occupational disease, for instance, may involve
prolonged exposure to injurious conditions where
no specic time, place, or cause is identiable. Ideally, the time, place, and cause of a loss should be
clear enough that a reasonable person, with sucient information, could objectively verify all three
elements.
29
premiums need to cover both the expected cost of
losses, plus the cost of issuing and administering the
policy, adjusting losses, and supplying the capital
needed to reasonably assure that the insurer will be
able to pay claims. For small losses, these latter costs
may be several times the size of the expected cost
of losses. There is hardly any point in paying such
costs unless the protection oered has real value to
a buyer.
5. Aordable premium: If the likelihood of an insured event is so high, or the cost of the event so
large, that the resulting premium is large relative to
the amount of protection oered, then it is not likely
that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in nancial accounting standards,
the premium cannot be so large that there is not
a reasonable chance of a signicant loss to the insurer. If there is no such chance of loss, then the
transaction may have the form of insurance, but not
the substance (see the U.S. Financial Accounting
Standards Board pronouncement number 113: Accounting and Reporting for Reinsurance of ShortDuration and Long-Duration Contracts).
6. Calculable loss: There are two elements that must
be at least estimable, if not formally calculable: the
probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while
cost has more to do with the ability of a reasonable
person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the
loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses:
Insurable losses are ideally independent and noncatastrophic, meaning that the losses do not happen all at once and individual losses are not severe
enough to bankrupt the insurer; insurers may prefer
to limit their exposure to a loss from a single event
to some small portion of their capital base. Capital
constrains insurers ability to sell earthquake insurance as well as wind insurance in hurricane zones.
In the United States, ood risk is insured by the federal government. In commercial re insurance, it
is possible to nd single properties whose total exposed value is well in excess of any individual insurers capital constraint. Such properties are generally shared among several insurers, or are insured
by a single insurer who syndicates the risk into the
reinsurance market.
3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside
the control of the beneciary of the insurance. The
loss should be pure, in the sense that it results from
an event for which there is only the opportunity for
cost. Events that contain speculative elements such
as ordinary business risks or even purchasing a lotLegal
tery ticket are generally not considered insurable.
4. Large loss: The size of the loss must be meaning- When a company insures an individual entity, there are
ful from the perspective of the insured. Insurance basic legal requirements and regulations. Several com-
30
2.
3.
4.
5.
6.
7.
insurance (i.e., a claim arises on the occurrence of a specied event). There are generally three types of insurance
Indemnity the insurance company indemnies, or contracts that seek to indemnify an insured:
compensates, the insured in the case of certain losses
1. A reimbursement policy
only up to the insureds interest.
2. A pay on behalf or on behalf of policy[19]
Benet insurance as it is stated in the study books
3. An indemnication policy
of The Chartered Insurance Institute, the insurance
company doesn't have the right of recovery from the
party who caused the injury and is to compensate From an insureds standpoint, the result is usually the
the Insured regardless of the fact that Insured had same: the insurer pays the loss and claims expenses.
already sued the negligent party for the damages (for If the Insured has a reimbursement policy, the insured
example, personal accident insurance)
can be required to pay for a loss and then be reimbursed
by the insurance carrier for the loss and out of pocket
Insurable interest the insured typically must di- costs including, with the permission of the insurer, claim
rectly suer from the loss. Insurable interest must expenses.[19][20]
exist whether property insurance or insurance on a
person is involved. The concept requires that the Under a pay on behalf policy, the insurance carrier
insured have a stake in the loss or damage to the would defend and pay a claim on behalf of the insured
life or property insured. What that stake is will be who would not be out of pocket for anything. Most moddetermined by the kind of insurance involved and ern liability insurance is written on the basis of pay on
the nature of the property ownership or relationship behalf language which enables the insurance carrier to
between the persons. The requirement of an in- manage and control the claim.
surable interest is what distinguishes insurance from Under an indemnication policy, the insurance carrier
gambling.
can generally either reimburse or pay on behalf of,
whichever is more benecial to it and the insured in the
Utmost good faith (Uberrima des) the insured
claim handling process.
and the insurer are bound by a good faith bond of
honesty and fairness. Material facts must be dis- An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'inclosed.
sured' party once risk is assumed by an 'insurer', the insurContribution insurers which have similar obliga- ing party, by means of a contract, called an insurance poltions to the insured contribute in the indemnica- icy. Generally, an insurance contract includes, at a mintion, according to some method.
imum, the following elements: identication of participating parties (the insurer, the insured, the beneciaries),
Subrogation the insurance company acquires legal
the premium, the period of coverage, the particular loss
rights to pursue recoveries on behalf of the insured;
event covered, the amount of coverage (i.e., the amount
for example, the insurer may sue those liable for the
to be paid to the insured or beneciary in the event of a
insureds loss. The Insurers can waive their subroloss), and exclusions (events not covered). An insured is
gation rights by using the special clauses.
thus said to be "indemnied" against the loss covered in
Causa proxima, or proximate cause the cause of the policy.
loss (the peril) must be covered under the insuring When insured parties experience a loss for a specied
agreement of the policy, and the dominant cause peril, the coverage entitles the policyholder to make a
must not be excluded
claim against the insurer for the covered amount of loss
as specied by the policy. The fee paid by the insured to
8. Mitigation In case of any loss or casualty, the asset the insurer for assuming the risk is called the premium.
owner must attempt to keep loss to a minimum, as Insurance premiums from many insureds are used to fund
if the asset was not insured.
accounts reserved for later payment of claims in theory
for a relatively few claimants and for overhead costs. So
long as an insurer maintains adequate funds set aside for
Indemnication
anticipated losses (called reserves), the remaining margin
is an insurers prot.
Main article: Indemnity
To indemnify means to make whole again, or to be
reinstated to the position that one was in, to the extent
possible, prior to the happening of a specied event or
peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather contingent
4.4. INSURANCE
31
help societies and individuals prepare for catastrophes Underwriting and investing
and mitigate the eects of catastrophes on both households and societies.
The business model is to collect more in premium and
Insurance can inuence the probability of losses through investment income than is paid out in losses, and to also
moral hazard, insurance fraud, and preventive steps by oer a competitive price which consumers will accept.
the insurance company. Insurance scholars have typi- Prot can be reduced to a simple equation:
cally used moral hazard to refer to the increased loss
Prot = earned premium + investment income
due to unintentional carelessness and moral hazard to re incurred loss underwriting expenses.
fer to increased risk due to intentional carelessness or
indierence.[21] Insurers attempt to address carelessness
through inspections, policy provisions requiring certain Insurers make money in two ways:
types of maintenance, and possible discounts for loss mitigation eorts. While in theory insurers could encourage
Through underwriting, the process by which insurers
investment in loss reduction, some commentators have
select the risks to insure and decide how much in
argued that in practice insurers had historically not agpremiums to charge for accepting those risks
gressively pursued loss control measuresparticularly to
prevent disaster losses such as hurricanesbecause of
By investing the premiums they collect from insured
concerns over rate reductions and legal battles. Howparties
ever, since about 1996 insurers have begun to take a more
active role in loss mitigation, such as through building
The most complicated aspect of the insurance business
codes.[22]
is the actuarial science of ratemaking (price-setting) of
policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After
Methods of insurance
producing rates, the insurer will use discretion to reject
In accordance with study books of The Chartered Insur- or accept risks through the underwriting process.
ance Institute, there are the following types of insurance: At the most basic level, initial ratemaking involves look1. Co-insurance risks shared between insurers
2. Dual insurance risks having two or more policies
with same coverage
3. Self-insurance situations where risk is not transferred to insurance companies and solely retained by
the entities or individuals themselves
4. Reinsurance situations when Insurer passes some
part of or all risks to another Insurer called Reinsurer
4.4.4
32
are collected and continue to earn interest or other income on them until claims are paid out. The Association
of British Insurers (gathering 400 insurance companies
and 94% of UK insurance services) has almost 20% of
the investments in the London Stock Exchange.[25]
4.4. INSURANCE
33
Auto insurance
Main article: Vehicle insurance
Auto insurance protects the policyholder against nancial
policyholders for dental costs. In most developed countries, all citizens receive some health coverage from their
governments, paid for by taxation. In most countries,
health insurance is often part of an employers benets.
Income protection insurance
Disability insurance policies provide nancial support in the event of the policyholder becoming unable to work because of disabling illness or injury.
It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term
and long-term disability policies are available to individuals, but considering the expense, long-term
policies are generally obtained only by those with
at least six-gure incomes, such as doctors, lawyers,
etc. Short-term disability insurance covers a person for a period typically up to six months, paying a
stipend each month to cover medical bills and other
necessities.
Long-term disability insurance covers an individuals expenses for the long term, up until such time as
they are considered permanently disabled and thereafter. Insurance companies will often try to encourage the person back into employment in preference
to and before declaring them unable to work at all
and therefore totally disabled.
34
Disability overhead insurance allows business owners to cover the overhead expenses of their business
while they are unable to work.
Total permanent disability insurance provides benets when a person is permanently disabled and can
no longer work in their profession, often taken as an
adjunct to life insurance.
Workers compensation insurance replaces all or
part of a workers wages lost and accompanying
medical expenses incurred because of a job-related
injury.
Casualty
Main article: Casualty insurance
Casualty insurance insures against accidents, not necessarily tied to any specic property. It is a broad spectrum
of insurance that a number of other types of insurance
could be classied, such as auto, workers compensation,
and some liability insurances.
Crime insurance is a form of casualty insurance that
covers the policyholder against losses arising from Amicable Society for a Perpetual Assurance Oce, Serjeants
the criminal acts of third parties. For example, a Inn, Fleet Street, London, 1801
company can obtain crime insurance to cover losses
arising from theft or embezzlement.
family, burial, funeral and other nal expenses. Life in Terrorism insurance provides protection against any surance policies often allow the option of having the proloss or damage caused by terrorist activities. In the ceeds paid to the beneciary either in a lump sum cash
United States in the wake of 9/11, the Terrorism payment or an annuity. In most states, a person cannot
Risk Insurance Act 2002 (TRIA) set up a federal purchase a policy on another person without their knowlprogram providing a transparent system of shared edge.
public and private compensation for insured losses Annuities provide a stream of payments and are generresulting from acts of terrorism. The program was ally classied as insurance because they are issued by inextended until the end of 2014 by the Terrorism surance companies, are regulated as insurance, and reRisk Insurance Program Reauthorization Act 2007 quire the same kinds of actuarial and investment man(TRIPRA).
agement expertise that life insurance requires. Annuities
and pensions that pay a benet for life are sometimes re Kidnap and ransom insurance is designed to protect
garded as insurance against the possibility that a retiree
individuals and corporations operating in high-risk
will outlive his or her nancial resources. In that sense,
areas around the world against the perils of kidnap,
they are the complement of life insurance and, from an
extortion, wrongful detention and hijacking.
underwriting perspective, are the mirror image of life in Political risk insurance is a form of casualty insur- surance.
ance that can be taken out by businesses with op- Certain life insurance contracts accumulate cash values,
erations in countries in which there is a risk that which may be taken by the insured if the policy is surrenrevolution or other political conditions could result dered or which may be borrowed against. Some policies,
in a loss.
such as annuities and endowment policies, are nancial
instruments to accumulate or liquidate wealth when it is
needed.
Life
In many countries, such as the United States and the UK,
Main article: Life insurance
the tax law provides that the interest on this cash value
Life insurance provides a monetary benet to a dece- is not taxable under certain circumstances. This leads to
dents family or other designated beneciary, and may widespread use of life insurance as a tax-ecient method
specically provide for income to an insured persons of saving as well as protection in the event of early death.
4.4. INSURANCE
35
In the United States, the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benet derived from tax deferral
may be oset by a low return. This depends upon the
insuring company, the type of policy and other variables
(mortality, market return, etc.). Moreover, other income
tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs)
may be better alternatives for value accumulation.
Burial insurance
US Airways Flight 1549 was written o after ditching into the
Burial insurance is a very old type of life insurance which Hudson River
is paid out upon death to cover nal expenses, such as the
cost of a funeral. The Greeks and Romans introduced
insures against accidental physical damage to boilburial insurance c. 600 CE when they organized guilds
ers, equipment or machinery.
called benevolent societies which cared for the surviving families and paid funeral expenses of members upon
Builders risk insurance insures against the risk of
death. Guilds in the Middle Ages served a similar purphysical loss or damage to property during construcpose, as did friendly societies during Victorian times.
tion. Builders risk insurance is typically written
on an all risk basis covering damage arising from
any cause (including the negligence of the insured)
Property
not otherwise expressly excluded. Builders risk inMain article: Property insurance
surance is coverage that protects a persons or orProperty insurance provides protection against risks to
ganizations insurable interest in materials, xtures
and/or equipment being used in the construction or
renovation of a building or structure should those
items sustain physical loss or damage from an insured peril.[29]
Crop insurance may be purchased by farmers to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage
caused by weather, hail, drought, frost damage, insects, or disease.[30]
Earthquake insurance is a form of property insurance that pays the policyholder in the event of
an earthquake that causes damage to the property.
Most ordinary home insurance policies do not cover
earthquake damage. Earthquake insurance policies
generally feature a high deductible. Rates depend on
location and hence the likelihood of an earthquake,
as well as the construction of the home.
Fidelity bond is a form of casualty insurance that
covers policyholders for losses incurred as a result
of fraudulent acts by specied individuals. It usually
insures a business for losses caused by the dishonest
acts of its employees.
36
Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the real estate industry as HOI), provides
coverage for damage or destruction of the policyholders home. In some geographical areas, the
policy may exclude certain types of risks, such as
ood or earthquake, that require additional coverage. Maintenance-related issues are typically the
homeowners responsibility. The policy may include
inventory, or this can be bought as a separate policy, especially for people who rent housing. In some
countries, insurers oer a package which may include liability and legal responsibility for injuries
and property damage caused by members of the
household, including pets.[31]
Landlord insurance covers residential and commercial properties which are rented to others. Most
homeowners insurance covers only owner-occupied
homes.
Marine insurance and marine cargo insurance cover
the loss or damage of vessels at sea or on inland waterways, and of cargo in transit, regardless of the
method of transit. When the owner of the cargo and
the carrier are separate corporations, marine cargo
insurance typically compensates the owner of cargo
for losses sustained from re, shipwreck, etc., but
excludes losses that can be recovered from the carrier or the carriers insurance. Many marine insurance underwriters will include time element coverage in such policies, which extends the indemnity
to cover loss of prot and other business expenses
attributable to the delay caused by a covered loss.
Supplemental natural disaster insurance covers
specied expenses after a natural disaster renders
the policyholders home uninhabitable. Periodic
payments are made directly to the insured until
the home is rebuilt or a specied time period has
elapsed.
Surety bond insurance is a three-party insurance
guaranteeing the performance of the principal.
Volcano insurance is a specialized insurance protecting against damage arising specically from
volcanic eruptions.
Windstorm insurance is an insurance covering the
damage that can be caused by wind events such as
hurricanes.
Liability
Main article: Liability insurance
Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance
include an aspect of liability coverage. For example, a
homeowners insurance policy will normally include liability coverage which protects the insured in the event of
a claim brought by someone who slips and falls on the
property; automobile insurance also includes an aspect
of liability insurance that indemnies against the harm
that a crashing car can cause to others lives, health, or
property. The protection oered by a liability insurance
policy is twofold: a legal defense in the event of a lawsuit
commenced against the policyholder and indemnication
(payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover
only the negligence of the insured, and will not apply to
results of wilful or intentional acts by the insured.
Public liability insurance covers a business or organization against claims should its operations injure
a member of the public or damage their property in
some way.
Directors and ocers liability insurance (D&O)
protects an organization (usually a corporation)
from costs associated with litigation resulting from
errors made by directors and ocers for which they
are liable.
Environmental liability insurance protects the insured from bodily injury, property damage and
4.4. INSURANCE
37
Trade credit insurance is business insurance over the
accounts receivable of the insured. The policy pays
the policy holder for covered accounts receivable if
the debtor defaults on payment.
Collateral protection insurance (CPI) insures property (primarily vehicles) held as collateral for loans
made by lending institutions.
Other types
Defense Base Act (DBA) insurance provides coverage for civilian workers hired by the government
to perform contracts outside the United States and
Canada. DBA is required for all U.S. citizens, U.S.
residents, U.S. Green Card holders, and all employees or subcontractors hired on overseas government
contracts. Depending on the country, foreign nationals must also be covered under DBA. This coverage typically includes expenses related to medical
treatment and loss of wages, as well as disability and
death benets.
38
Expatriate insurance provides individuals and organizations operating outside of their home country
with protection for automobiles, property, health, liability and business pursuits.
Legal expenses insurance covers policyholders for
the potential costs of legal action against an institution or an individual. When something happens
which triggers the need for legal action, it is known
as the event. There are two main types of legal
expenses insurance: before the event insurance and
after the event insurance.
Livestock insurance is a specialist policy provided
to, for example, commercial or hobby farms, aquariums, sh farms or any other animal holding. Cover
is available for mortality or economic slaughter as a
result of accident, illness or disease but can extend
to include destruction by government order.
Media liability insurance is designed to cover professionals that engage in lm and television production
and print, against risks such as defamation.
Nuclear incident insurance covers damages resulting
from an incident involving radioactive materials and
is generally arranged at the national level. (See the
nuclear exclusion clause and for the US the PriceAnderson Nuclear Industries Indemnity Act.)
Pet insurance insures pets against accidents and illnesses; some companies cover routine/wellness care
and burial, as well.
No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds are indemnied by their own insurer regardless of fault in
the incident.
Pollution insurance usually takes the form of rstparty coverage for contamination of insured property either by external or on-site sources. Coverage
is also aorded for liability to third parties arising
from contamination of air, water, or land due to the
sudden and accidental release of hazardous materials from the insured site. The policy usually covers
the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional
acts are specically excluded.
Protected self-insurance is an alternative risk nancing mechanism in which an organization retains the
mathematically calculated cost of risk within the organization and transfers the catastrophic risk with
specic and aggregate limits to an insurer so the
maximum total cost of the program is known. A
properly designed and underwritten Protected SelfInsurance Program reduces and stabilizes the cost
of insurance and provides valuable risk management
information.
Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection,
warranties, guarantees, care plans and even mobile
phone insurance. Such insurance is normally very
limited in the scope of problems that are covered by
the policy.
Tax insurance is increasingly being used in corporate
transactions to protect taxpayers in the event that a
tax position it has taken is challenged by the IRS or
a state, local, or foreign taxing authority[33]
Title insurance provides a guarantee that title to
real property is vested in the purchaser and/or
mortgagee, free and clear of liens or encumbrances.
4.4. INSURANCE
Formal self-insurance is the deliberate decision to
pay for otherwise insurable losses out of ones own
money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing
the purchase of available insurance and paying outof-pocket. Self-insurance is usually used to pay for
high-frequency, low-severity losses. Such losses, if
covered by conventional insurance, mean having to
pay a premium that includes loadings for the companys general expenses, cost of putting the policy
on the books, acquisition expenses, premium taxes,
and contingencies. While this is true for all insurance, for small, frequent losses the transaction costs
may exceed the benet of volatility reduction that
insurance otherwise aords.
Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used
for capital management rather than to transfer insurance risk.
Social insurance can be many things to many people
in many countries. But a summary of its essence is
that it is a collection of insurance coverages (including components of life insurance, disability income
insurance, unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant
when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as
the justice system and the welfare state. This is a
large, complicated topic that engenders tremendous
debate, which can be further studied in the following
articles (and others):
39
transfer, which assigns explicit numerical values to risk.
A number of religious groups, including the Amish and
some Muslim groups, depend on support provided by
their communities when disasters strike. The risk presented by any given person is assumed collectively by
the community who all bear the cost of rebuilding lost
property and supporting people whose needs are suddenly
greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In
this manner the community can even out the extreme
dierences in insurability that exist among its members.
Some further justication is also provided by invoking
the moral hazard of explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from
public funds because, in the long run, this was cheaper
than paying insurance premiums. Since many UK government buildings have been sold to property companies,
and rented back, this arrangement is now less common
and may have disappeared altogether.
In the United States, the most prevalent form of selfinsurance is governmental risk management pools. They
are self-funded cooperatives, operating as carriers of coverage for the majority of governmental entities today,
such as county governments, municipalities, and school
districts. Rather than these entities independently selfinsure and risk bankruptcy from a large judgment or
catastrophic loss, such governmental entities form a risk
pool. Such pools begin their operations by capitalization
through member deposits or bond issuance. Coverage
(such as general liability, auto liability, professional liability, workers compensation, and property) is oered
by the pool to its members, similar to coverage oered
by insurance companies. However, self-insured pools offer members lower rates (due to not needing insurance
National Insurance
brokers), increased benets (such as loss prevention ser Social safety net
vices) and subject matter expertise. Of approximately
91,000 distinct governmental entities operating in the
Social security
United States, 75,000 are members of self-insured pools
Social Security debate (United States)
in various lines of coverage, forming approximately 500
Social Security (United States)
pools. Although a relatively small corner of the insurance
Social welfare provision
market, the annual contributions (self-insured premiums)
Stop-loss insurance provides protection against to such pools have been estimated up to 17 billion dollars
[35]
catastrophic or unpredictable losses. It is purchased annually.
by organizations who do not want to assume 100%
of the liability for losses arising from the plans. Under a stop-loss policy, the insurance company be- 4.4.6 Insurance companies
comes liable for losses that exceed certain limits
Insurance companies may be classied into two groups:
called deductibles.
Closed community and governmental self-insurance
40
In most countries, life and non-life insurers are subject to dierent regulatory regimes and dierent tax and
accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and
pension business is very long-term in nature coverage
for life assurance or a pension can cover risks over many Most states require that excess line insurers submit nandecades. By contrast, non-life insurance cover usually cial information, articles of incorporation, a list of ocovers a shorter period, such as one year.
cers, and other general information.[36] They also may not
In the United States, standard line insurance companies write insurance that is typically available in the admitted
are insurers that have received a license or authorization market, do not participate in state guarantee funds (and
from a state for the purpose of writing specic kinds of therefore policyholders do not have any recourse through
insurance in that state, such as automobile insurance or these funds if an insurer becomes insolvent and cannot
pay claims), may pay higher taxes, only may write covhomeowners insurance.[36] They are typically referred
to as admitted insurers. Generally, such an insurance erage for a risk if it has been rejected by three dierent
admitted insurers, and only when the insurance producer
company must submit its rates and policy forms to the
[36]
states insurance regulator to receive his or her prior ap- placing the business has a surplus lines license. Generally, when an excess line insurer writes a policy, it must,
proval, although whether an insurance company must receive prior approval depends upon the kind of insurance pursuant to state laws, provide disclosure to the policyholder that the policyholders policy is being written by
being written. Standard line insurance companies usually
[36]
charge lower premiums than excess line insurers and may an excess line insurer.
On July 21, 2010, President Barack Obama signed into
law the Nonadmitted and Reinsurance Reform Act of
2010 (NRRA), which took eect on July 21, 2011,
and was part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act. The NRRA changed the regulatory paradigm for excess line insurance. Generally,
state may regExcess line insurance companies (also known as Excess under the NRRA, only the insureds home
[37]
ulate
and
tax
the
excess
line
transaction.
and Surplus) typically insure risks not covered by the
standard lines insurance market, due to a variety of rea- Insurance companies are generally classied as either
sons (e.g., new entity or an entity that does not have an mutual or proprietary companies.[38] Mutual companies
adequate loss history, an entity with unique risk charac- are owned by the policyholders, while shareholders (who
teristics, or an entity that has a loss history that does not may or may not own policies) own proprietary insurance
t the underwriting requirements of the standard lines companies.
sell directly to individual insureds. They are regulated by
state laws, which include restrictions on rates and forms,
and which aim to protect consumers and the public from
unfair or abusive practices.[36] These insurers also are required to contribute to state guarantee funds, which are
used to pay for losses if an insurer becomes insolvent.[36]
4.4. INSURANCE
Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late 20th century.
However, not all states permit mutual holding companies.
41
the world
Rating structures which reect market trends rather
than individual loss experience
42
4.4. INSURANCE
43
public policy of most countries to allow such insurance to buys (while a free agent sales policies of various insurance
exist, and thus it is usually illegal.
companies). Just as there is a potential conict of interest with a broker, an agent has a dierent type of conict.
Because agents work directly for the insurance company,
Complexity of insurance policy contracts
if there is a claim the agent may advise the client to the
benet of the insurance company. Agents generally cannot oer as broad a range of selection compared to an
insurance broker.
An independent insurance consultant advises insureds on
a fee-for-service retainer, similar to an attorney, and thus
oers completely independent advice, free of the nancial
conict of interest of brokers and/or agents. However,
such a consultant must still work through brokers and/or
agents in order to secure coverage for their clients.
Limited consumer benets
9/11 was a major insurance loss, but there were disputes over the
World Trade Center's insurance policy
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies
on unfavorable terms. In response to these issues, many
countries have enacted detailed statutory and regulatory
regimes governing every aspect of the insurance business,
including minimum standards for policies and the ways in
which they may be advertised and sold.
For example, most insurance policies in the English language today have been carefully drafted in plain English;
the industry learned the hard way that many courts will
not enforce policies against insureds when the judges
themselves cannot understand what the policies are saying. Typically, courts construe ambiguities in insurance
policies against the insurance company and in favor of
coverage under the policy.
Many institutional insurance purchasers buy insurance
through an insurance broker. While on the surface it appears the broker represents the buyer (not the insurance
company), and typically counsels the buyer on appropriate coverage and policy limitations, in the vast majority
of cases a brokers compensation comes in the form of
a commission as a percentage of the insurance premium,
creating a conict of interest in that the brokers nancial
interest is tilted towards encouraging an insured to purchase more insurance than might be necessary at a higher
price. A broker generally holds contracts with many insurers, thereby allowing the broker to shop the market
for the best rates and coverage possible.
In United States, economists and consumer advocates generally consider insurance to be worthwhile for
low-probability, catastrophic losses, but not for highprobability, small losses. Because of this, consumers
are advised to select high deductibles and to not insure
losses which would not cause a disruption in their life.
However, consumers have shown a tendency to prefer
low deductibles and to prefer to insure relatively highprobability, small losses over low-probability, perhaps
due to not understanding or ignoring the low-probability
risk. This is associated with reduced purchasing of insurance against low-probability losses, and may result in
increased ineciencies from moral hazard.[49]
Redlining
Redlining is the practice of denying insurance coverage
in specic geographic areas, supposedly because of a high
likelihood of loss, while the alleged motivation is unlawful discrimination. Racial proling or redlining has a long
history in the property insurance industry in the United
States. From a review of industry underwriting and marketing materials, court documents, and research by government agencies, industry and community groups, and
academics, it is clear that race has long aected and continues to aect the policies and practices of the insurance
industry.[50]
In July 2007, The Federal Trade Commission (FTC) released a report presenting the results of a study concerning credit-based insurance scores in automobile insurance. The study found that these scores are eective predictors of risk. It also showed that African-Americans
and Hispanics are substantially overrepresented in the
lowest credit scores, and substantially underrepresented
in the highest, while Caucasians and Asians are more
evenly spread across the scores. The credit scores were
Insurance may also be purchased through an agent. A also found to predict risk within each of the ethnic groups,
tied agent, working exclusively with one insurer, repre- leading the FTC to conclude that the scoring models are
sents the insurance company from whom the policyholder not solely proxies for redlining. The FTC indicated little
44
Many insurance executives are opposed to patenting insurance products because it creates a new risk for them.
The Hartford insurance company, for example, recently
All states have provisions in their rate regulation laws or in had to pay $80 million to an independent inventor, Bantheir fair trade practice acts that prohibit unfair discrimi- corp Services, in order to settle a patent infringement and
nation, often called redlining, in setting rates and making theft of trade secret lawsuit for a type of corporate owned
insurance available.[53]
life insurance product invented and patented by Bancorp.
Inventors can now have their insurance US patent applications reviewed by the public in the Peer to Patent
program.[55] The rst insurance patent to be granted was
[56]
including another example of an application posted
was US2009005522 risk assessment company. It was
An insurance underwriters job is to evaluate a given risk posted on March 6, 2009. This patent application deas to the likelihood that a loss will occur. Any factor scribes a method for increasing the ease of changing inthat causes a greater likelihood of loss should theoreti- surance companies.[57]
cally be charged a higher rate. This basic principle of
insurance must be followed if insurance companies are to
remain solvent. Thus, discrimination against (i.e., neg- The insurance industry and rent-seeking
ative dierential treatment of) potential insureds in the
risk evaluation and premium-setting process is a neces- Certain insurance products and practices have been desary by-product of the fundamentals of insurance under- scribed as rent-seeking by critics. That is, some insurwriting. For instance, insurers charge older people signif- ance products or practices are useful primarily because
icantly higher premiums than they charge younger people of legal benets, such as reducing taxes, as opposed to
for term life insurance. Older people are thus treated dif- providing protection against risks of adverse events. Unferently from younger people (i.e., a distinction is made, der United States tax law, for example, most owners of
discrimination occurs). The rationale for the dierential variable annuities and variable life insurance can invest
treatment goes to the heart of the risk a life insurer takes: their premium payments in the stock market and defer
Old people are likely to die sooner than young people, or eliminate paying any taxes on their investments until
so the risk of loss (the insureds death) is greater in any withdrawals are made. Sometimes this tax deferral is the
given period of time and therefore the risk premium must only reason people use these products. Another example
be higher to cover the greater risk. However, treating in- is the legal infrastructure which allows life insurance to be
sureds dierently when there is no actuarially sound rea- held in an irrevocable trust which is used to pay an estate
tax while the proceeds themselves are immune from the
son for doing so is unlawful discrimination.
estate tax.
Insurance patents
Religious concerns
Further information: Insurance patent
New assurance products can now be protected from copying with a business method patent in the United States.
A recent example of a new insurance product that is
patented is Usage Based auto insurance. Early versions
were independently invented and patented by a major
US auto insurance company, Progressive Auto Insurance
(U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP 0700009).
Muslim scholars have varying opinions about life insurance. Life insurance policies that earn interest (or guaranteed bonus/NAV) are generally considered to be a form
of riba[58] (usury) and some consider even policies that
do not earn interest to be a form of gharar (speculation).
Some argue that gharar is not present due to the actuarial science behind the underwriting.[59] Jewish rabbinical
scholars also have expressed reservations regarding insurance as an avoidance of Gods will but most nd it acceptable in moderation.[60]
Many independent inventors are in favor of patenting new Some Christians believe insurance represents a lack of
insurance products since it gives them protection from big faith and there is a long history of resistance to commer-
4.4. INSURANCE
cial insurance in Anabaptist communities (Mennonites,
Amish, Hutterites, Brethren in Christ) but many participate in community-based self-insurance programs that
spread risk within their communities.[61][62][63]
4.4.9
See also
Agent of Record
Earthquake loss
Financial services (broader industry to which insurance belongs)
Geneva Association (the International Association
for the Study of Insurance Economics)
Global assets under management
Insurance fraud
Insurance Hall of Fame
Insurance law
Insurance Premium Tax (UK)
45
[3] J. Franklin, The Science of Conjecture: Evidence and Probability Before Pascal (Baltimore: Johns Hopkins University Press, 2001), 274-277.
[4] Dickson (1960): 4
[5] Dickson (1960): 7
[6] Palmer, Sarah (October 2007). Lloyd, Edward (c.1648
1713)". Oxford Dictionary of National Biography. Oxford
University Press. doi:10.1093/ref:odnb/16829. Retrieved
16 February 2011.
[7] Anzovin, Steven, Famous First Facts 2000, item # 2422,
H. W. Wilson Company, ISBN 0-8242-0958-3 p. 121
The rst life insurance company known of record was
founded in 1706 by the Bishop of Oxford and the nancier
Thomas Allen in London, England. The company, called
the Amicable Society for a Perpetual Assurance Oce, collected annual premiums from policyholders and paid the
nominees of deceased members from a common fund.
[8] Amicable Society, The charters, acts of Parliament, and
by-laws of the corporation of the Amicable Society for a
perpetual assurance oce, Gilbert and Rivington, 1854,
p. 4
[9] Today and History:The History of Equitable Life.
2009-06-26. Retrieved 2009-08-16.
The Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know (book)
[12] E. P. Hennock, The Origin of the Welfare State in England and Germany, 18501914: Social Policies Compared
(2007)
[13] Hermann Beck, Origins of the Authoritarian Welfare State
in Prussia, 1815-1870 (1995)
[14] The Cabinet Papers 1915-1982: National Health Insurance Act 1911. The National Archives, 2013. Retrieved
30 June 2013.
[15] Bentley B. Gilbert, British social policy, 1914-1939 (1970)
[16] Gollier C. (2003). To Insure or Not to Insure?: An Insurance Puzzle. The Geneva Papers on Risk and Insurance
Theory.
[17] This discussion is adapted from Mehr and Camack Principles of Insurance, 6th edition, 1976, pp 34 37.
[18] Irish Brokers Association. Insurance Principles.
[19] C. Kulp & J. Hall, Casualty Insurance, Fourth Edition,
1968, page 35
[20] However, bankruptcy of the insured with a reimbursement policy does not relieve the insurer. Certain types of
insurance, e.g., workers compensation and personal automobile liability, are subject to statutory requirements that
injured parties have direct access to coverage.
[2] Lex Rhodia: The Ancient Ancestor of Maritime Law 800 BC.
4.4.10
Notes
46
[56] US6922720 SYSTEMS AND METHODS FOR INSURING DATA OVER THE INTERNET
[38] David Ransom (2011). IF1 Insurance, Legal & Regulatory. Chartered Insurance Institute. p. 2/5. ISBN 978 0
85713 094 5.
[57] Bakos, Nowotarski, "An Experiment in Better Patent Examination", Insurance IP Bulletin, December 15, 2008.
[39] http://www.thecityuk.com/assets/Uploads/
Insurance-2011-F2.pdf PDF (365 KB) p. 2
[40] Sam Radwan, "Chinas Insurance Market: Lessons
Learned from Taiwan", Bloomberg Businessweek, June
2010.
[58] Islam Question and Answer The true nature of insurance and the rulings concerning it. Retrieved 2010-0118.
[59] Life Insurance from an Islamic Perspective. Retrieved
2010-01-18.
4.4. INSURANCE
4.4.11
Bibliography
4.4.12
External links
47
Chapter 5
Risk Management
5.1 Derivative
5.1.1
Separate special purpose entitiesrather than the parent investment bankissue the CDOs and pay interest to
investors. As CDOs developed, some sponsors repackaged tranches into yet another iteration called CDOsquared or the CDOs of CDOs.[7] In the early 2000s,
CDOs were generally diversied,[8] but by 20062007
when the CDO market grew to hundreds of billions of
dollarsthis changed. CDO collateral became dominated not by loans, but by lower level (BBB or A) tranches
recycled from other asset-backed securities, whose assets
were usually non-prime mortgages.[9] These CDOs have
been called the engine that powered the mortgage supply chain for nonprime mortgages,[10] and are credited
with giving lenders greater incentive to make non-prime
loans[11] leading up to the 2007-9 subprime mortgage crisis.
48
5.1. DERIVATIVE
agency.[17] During the 2007-2010 nancial crisis the lack
of transparency in this large market became a concern
to regulators as it could pose a systemic risk.[18][19][20][21]
In March 2010, the [DTCC] Trade Information Warehouse (see Sources of Market Data) announced it would
give regulators greater access to its credit default swaps
database.[22] CDS data can be used by nancial professionals, regulators, and the media to monitor how the
market views credit risk of any entity on which a CDS
is available, which can be compared to that provided by
credit rating agencies. U.S. courts may soon be following
suit.[12] Most CDSs are documented using standard forms
drafted by the International Swaps and Derivatives Association (ISDA), although there are many variants.[18] In
addition to the basic, single-name swaps, there are basket
default swaps (BDSs), index CDSs, funded CDSs (also
called credit-linked notes), as well as loan-only credit
default swaps (LCDS). In addition to corporations and
governments, the reference entity can include a special
purpose vehicle issuing asset-backed securities.[23] Some
claim that derivatives such as CDS are potentially dangerous in that they combine priority in bankruptcy with a
lack of transparency.[19] A CDS can be unsecured (without collateral) and be at higher risk for a default.
5.1.3
Forwards
49
A closely related contract is a futures contract; they dier
in certain respects. Forward contracts are very similar
to futures contracts, except they are not exchange-traded,
or dened on standardized assets.[26] Forwards also typically have no interim partial settlements or true-ups in
margin requirements like futuressuch that the parties
do not exchange additional property securing the party
at gain and the entire unrealized gain or loss builds up
while the contract is open. However, being traded over
the counter (OTC), forward contracts specication can
be customized and may include mark-to-market and daily
margin calls. Hence, a forward contract arrangement
might call for the loss party to pledge collateral or additional collateral to better secure the party at gain. In other
words, the terms of the forward contract will determine
the collateral calls based upon certain trigger events relevant to a particular counterparty such as among other
things, credit ratings, value of assets under management
or redemptions over a specic time frame (e.g., quarterly,
annually).
5.1.4 Futures
In nance, a futures contract (more colloquially, futures) is a standardized contract between two parties to
buy or sell a specied asset of standardized quantity and
quality for a price agreed upon today (the futures price)
with delivery and payment occurring at a specied future date, the delivery date, making it a derivative product (i.e. a nancial product that is derived from an underlying asset). The contracts are negotiated at a futures
exchange, which acts as an intermediary between buyer
and seller. The party agreeing to buy the underlying asset in the future, the buyer of the contract, is said to
be "long", and the party agreeing to sell the asset in the
future, the seller of the contract, is said to be "short".
While the futures contract species a trade taking place
in the future, the purpose of the futures exchange is to act
as intermediary and mitigate the risk of default by either
party in the intervening period. For this reason, the futures exchange requires both parties to put up an initial
amount of cash (performance bond), the margin. Margins, sometimes set as a percentage of the value of the
futures contact needs to be proportionally maintained at
all times during the life of the contract to underpin this
mitigation because the price of the contract will vary in
keeping with supply and demand and will change daily
and thus one party or the other will theoretically be making or losing money. To mitigate risk and the possibility of default by either party, the product is marked to
market on a daily basis whereby the dierence between
the prior agreed-upon price and the actual daily futures
price is settled on a daily basis. This is sometimes known
as the variation margin where the futures exchange will
draw money out of the losing partys margin account and
put it into the other partys thus ensuring that the correct
daily loss or prot is reected in the respective account.
50
are/were often further repackaged and resold as collaterized debt obligations.[28] These subprime MBSs issued
by investment banks were a major issue in the subprime
mortgage crisis of 20062008 . The total face value of
an MBS decreases over time, because like mortgages, and
unlike bonds, and most other xed-income securities, the
principal in an MBS is not paid back as a single payment
to the bond holder at maturity but rather is paid along with
the interest in each periodic payment (monthly, quarterly,
etc.). This decrease in face value is measured by the
MBSs factor, the percentage of the original face that
A closely related contract is a forward contract. A forward is like a futures in that it species the exchange remains to be repaid.
of goods for a specied price at a specied future date.
However, a forward is not traded on an exchange and thus
does not have the interim partial payments due to mark- 5.1.6 Options
ing to market. Nor is the contract standardized, as on
the exchange. Unlike an option, both parties of a futures In nance, an option is a contract which gives the buyer
contract must fulll the contract on the delivery date. The (the owner) the right, but not the obligation, to buy or
seller delivers the underlying asset to the buyer, or, if it sell an underlying asset or instrument at a specied strike
is a cash-settled futures contract, then cash is transferred price on or before a specied date. The seller has the
from the futures trader who sustained a loss to the one corresponding obligation to fulll the transactionthat
who made a prot. To exit the commitment prior to the is to sell or buyif the buyer (owner) exercises the
settlement date, the holder of a futures position can close option. The buyer pays a premium to the seller for this
out its contract obligations by taking the opposite position right. An option that conveys to the owner the right to
on another futures contract on the same asset and settle- buy something at a certain price is a "call option"; an opment date. The dierence in futures prices is then a prot tion that conveys the right of the owner to sell something
at a certain price is a "put option". Both are commonly
or loss.
traded, but for clarity, the call option is more frequently
discussed. Options valuation is a topic of ongoing re5.1.5 Mortgage-backed securities
search in academic and practical nance. In basic terms,
the value of an option is commonly decomposed into two
A mortgage-backed security (MBS) is a asset-backed parts:
security that is secured by a mortgage, or more commonly a collection (pool) of sometimes hundreds of
The rst part is the intrinsic value, dened as
mortgages. The mortgages are sold to a group of indithe dierence between the market value of the
viduals (a government agency or investment bank) that
underlying and the strike price of the given option.
"securitizes", or packages, the loans together into a security that can be sold to investors. The mortgages of
The second part is the time value, which depends
an MBS may be residential or commercial, depending on
on a set of other factors which, through a mulwhether it is an Agency MBS or a Non-Agency MBS;
tivariable, non-linear interrelationship, reect the
in the United States they may be issued by structures
discounted expected value of that dierence at exset up by government-sponsored enterprises like Fannie
piration.
Mae or Freddie Mac, or they can be private-label, issued by structures set up by investment banks. The structure of the MBS may be known as pass-through, where Although options valuation has been studied since the
the interest and principal payments from the borrower or 19th century, the contemporary approach is based on
homebuyer pass through it to the MBS holder, or it may the BlackScholes model, which was rst published in
be more complex, made up of a pool of other MBSs. 1973.[29][30]
Other types of MBS include collateralized mortgage obli- Options contracts have been known for many centuries,
gations (CMOs, often structured as real estate mortgage however both trading activity and academic interest ininvestment conduits) and collateralized debt obligations creased when, as from 1973, options were issued with
(CDOs).[27]
standardized terms and traded through a guaranteed
The shares of subprime MBSs issued by various structures, such as CMOs, are not identical but rather issued as
tranches (French for slices), each with a dierent level
of priority in the debt repayment stream, giving them different levels of risk and reward. Tranchesespecially
the lower-priority, higher-interest tranchesof an MBS
5.1. DERIVATIVE
51
CMC Markets
CommexFX
Currenex
Darwinex
DBFX
EToro
ETX Capital
Finspreads
FXCM
FXdirekt Bank
market-maker. Options are part of a larger class of nancial instruments known as derivative products or simply
derivatives.[24][31]
5.1.7
Swaps
5.1.8
Alpari
FXOpen
FXPro
Gain Capital
Hirose Financial
I-Access Investors
IDealing
IG
InstaForex
Interactive Brokers
Intregal Forex
InterTrader
IronFX
Marex Spectron
MF Global
MFX Broker
MRC Markets
Oanda Corporation
OptionsXpress
Anyoption
Pepperstone
AvaTrade
Plus 500
Banc de Binary
Saxo Bank
Cantor Fitzgerald
Spreadex
CitiFXPro
Sucden
TeleTrade
52
TFI Markets
Thinkorswim
Varengold
Wizetrade
Worldspreads
XM.com
X-Trade Brokers
Zulu Trade
5.1.9
Basics
5.1. DERIVATIVE
53
more for a policy with greater liability protections (intrinsic value) and one that extends for a year rather than
six months (time value). Because of the immediate option value, the option purchaser typically pays an up front
premium. Just like for lock products, movements in the
underlying asset will cause the options intrinsic value to
change over time while its time value deteriorates steadily
5.1.11 Usage
until the contract expires. An important dierence between a lock product is that, after the initial exchange,
Derivatives are used for the following:
the option purchaser has no further liability to its counterparty; upon maturity, the purchaser will execute the
Hedge or mitigate risk in the underlying, by entering option if it has positive value (i.e. if it is in the money)
into a derivative contract whose value moves in the or expire at no cost (other than to the initial premium)
opposite direction to their underlying position and (i.e. if the option is out of the money).
cancels part or all of it out[42][43]
Create option ability where the value of the deriva- Hedging
tive is linked to a specic condition or event (e.g.,
the underlying reaching a specic price level)
Main article: Hedge (nance)
Obtain exposure to the underlying where it is not
possible to trade in the underlying (e.g., weather Derivatives allow risk related to the price of the underderivatives)[44]
lying asset to be transferred from one party to another.
For example, a wheat farmer and a miller could sign a
Provide leverage (or gearing), such that a small
futures contract to exchange a specied amount of cash
movement in the underlying value can cause a large
for a specied amount of wheat in the future. Both parties
dierence in the value of the derivative[45]
have reduced a future risk: for the wheat farmer, the un Speculate and make a prot if the value of the under- certainty of the price, and for the miller, the availability of
lying asset moves the way they expect (e.g. moves in wheat. However, there is still the risk that no wheat will
a given direction, stays in or out of a specied range, be available because of events unspecied by the contract,
such as the weather, or that one party will renege on the
reaches a certain level)
contract. Although a third party, called a clearing house,
Switch asset allocations between dierent asset insures a futures contract, not all derivatives are insured
classes without disturbing the underlying assets, as against counter-party risk.
part of transition management
From another perspective, the farmer and the miller both
Avoid paying taxes. For example, an equity swap
allows an investor to receive steady payments, e.g.
based on LIBOR rate, while avoiding paying capital
gains tax and keeping the stock.
Mechanics and Valuation Basics
Lock products are theoretically valued at zero at the time
of execution and thus do not typically require an up-front
exchange between the parties. Based upon movements in
the underlying asset over time, however, the value of the
contract will uctuate, and the derivative may be either
an asset (i.e. "in the money") or a liability (i.e. "out of
the money") at dierent points throughout its life. Importantly, either party is therefore exposed to the credit
quality of its counterparty and is interested in protecting
itself in an event of default.
Option products have immediate value at the outset because they provide specied protection (intrinsic value)
over a given time period (time value). One common form
of option product familiar to many consumers is insurance for homes and automobiles. The insured would pay
reduce a risk and acquire a risk when they sign the futures contract: the farmer reduces the risk that the price
of wheat will fall below the price specied in the contract and acquires the risk that the price of wheat will rise
above the price specied in the contract (thereby losing
additional income that he could have earned). The miller,
on the other hand, acquires the risk that the price of wheat
will fall below the price specied in the contract (thereby
paying more in the future than he otherwise would have)
and reduces the risk that the price of wheat will rise above
the price specied in the contract. In this sense, one party
is the insurer (risk taker) for one type of risk, and the
counter-party is the insurer (risk taker) for another type
of risk.
Hedging also occurs when an individual or institution
buys an asset (such as a commodity, a bond that has
coupon payments, a stock that pays dividends, and so on)
and sells it using a futures contract. The individual or
institution has access to the asset for a specied amount
of time, and can then sell it in the future at a specied
price according to the futures contract. Of course, this
allows the individual or institution the benet of holding
the asset, while reducing the risk that the future selling
54
price will deviate unexpectedly from the markets current son incurred a US$1.3 billion loss that bankrupted the
assessment of the future value of the asset.
centuries-old institution.[49]
Proportion Used for Hedging and Speculation
The true proportion of derivatives contracts used for
hedging purposes is unknown[50] (and perhaps unknowable), but it appears to be relatively small.[51][52] Also,
derivatives contracts account for only 36% of the median rms total currency and interest rate exposure.[53]
Nonetheless, we know that many rms derivatives activities have at least some speculative component for a variety of reasons.[53]
5.1.12 Types
Derivatives traders at the Chicago Board of Trade
Derivatives trading of this kind may serve the nancial inIn broad terms, there are two groups of derivative conterests of certain particular businesses.[46] For example, a
tracts, which are distinguished by the way they are traded
corporation borrows a large sum of money at a specic inin the market:
terest rate.[47] The interest rate on the loan reprices every
six months. The corporation is concerned that the rate of
Over-the-counter (OTC) derivatives are contracts
interest may be much higher in six months. The corporathat are traded (and privately negotiated) directly
tion could buy a forward rate agreement (FRA), which is
between two parties, without going through an exa contract to pay a xed rate of interest six months after
change or other intermediary. Products such as
[48]
purchases on a notional amount of money.
If the inswaps, forward rate agreements, exotic options and
terest rate after six months is above the contract rate, the
other exotic derivatives are almost always traded in
seller will pay the dierence to the corporation, or FRA
this way. The OTC derivative market is the largest
buyer. If the rate is lower, the corporation will pay the
market for derivatives, and is largely unregulated
dierence to the seller. The purchase of the FRA serves
with respect to disclosure of information between
to reduce the uncertainty concerning the rate increase and
the parties, since the OTC market is made up of
stabilize earnings.
banks and other highly sophisticated parties, such as
hedge funds. Reporting of OTC amounts is dicult
because trades can occur in private, without activity
Speculation and arbitrage
being visible on any exchange.
Derivatives can be used to acquire risk, rather than to
hedge against risk. Thus, some individuals and institutions will enter into a derivative contract to speculate on
the value of the underlying asset, betting that the party
seeking insurance will be wrong about the future value
of the underlying asset. Speculators look to buy an asset in the future at a low price according to a derivative
contract when the future market price is high, or to sell an
asset in the future at a high price according to a derivative
contract when the future market price is less.
Individuals and institutions may also look for arbitrage
opportunities, as when the current buying price of an asset
falls below the price specied in a futures contract to sell
the asset.
Speculative trading in derivatives gained a great deal of
notoriety in 1995 when Nick Leeson, a trader at Barings
Bank, made poor and unauthorized investments in futures
contracts. Through a combination of poor judgment, lack
of oversight by the banks management and regulators,
and unfortunate events like the Kobe earthquake, Lee-
5.1. DERIVATIVE
ized derivatives exchanges or other exchanges. A
derivatives exchange is a market where individuals
trade standardized contracts that have been dened
by the exchange.[24] A derivatives exchange acts as
an intermediary to all related transactions, and takes
initial margin from both sides of the trade to act as
a guarantee. The worlds largest[56] derivatives exchanges (by number of transactions) are the Korea
Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European
products such as interest rate & index products),
and CME Group (made up of the 2007 merger of
the Chicago Mercantile Exchange and the Chicago
Board of Trade and the 2008 acquisition of the New
York Mercantile Exchange). According to BIS, the
combined turnover in the worlds derivatives exchanges totaled USD 344 trillion during Q4 2005.
By December 2007 the Bank for International Settlements reported[54] that derivatives traded on exchanges surged 27% to a record $681 trillion.[54]
Common derivative contract types
Some of the common variants of derivative contracts are
as follows:
1. Forwards: A tailored contract between two parties,
where payment takes place at a specic time in the
future at todays pre-determined price.
2. Futures: are contracts to buy or sell an asset on a future date at a price specied today. A futures contract diers from a forward contract in that the futures contract is a standardized contract written by a
clearing house that operates an exchange where the
contract can be bought and sold; the forward contract is a non-standardized contract written by the
parties themselves.
3. Options are contracts that give the owner the right,
but not the obligation, to buy (in the case of a call
option) or sell (in the case of a put option) an asset.
The price at which the sale takes place is known as
the strike price, and is specied at the time the parties enter into the option. The option contract also
species a maturity date. In the case of a European
option, the owner has the right to require the sale
to take place on (but not before) the maturity date;
in the case of an American option, the owner can
require the sale to take place at any time up to the
maturity date. If the owner of the contract exercises this right, the counter-party has the obligation
to carry out the transaction. Options are of two
types: call option and put option. The buyer of a
Call option has a right to buy a certain quantity of
the underlying asset, at a specied price on or before
a given date in the future, he however has no obligation whatsoever to carry out this right. Similarly, the
55
buyer of a Put option has the right to sell a certain
quantity of an underlying asset, at a specied price
on or before a given date in the future, he however
has no obligation whatsoever to carry out this right.
4. Binary options are contracts that provide the owner
with an all-or-nothing prot prole.
5. Warrants: Apart from the commonly used shortdated options which have a maximum maturity period of 1 year, there exists certain long-dated options
as well, known as Warrant (nance). These are generally traded over-the-counter.
6. Swaps are contracts to exchange cash (ows) on
or before a specied future date based on the
underlying value of currencies exchange rates,
bonds/interest rates, commodities exchange, stocks
or other assets. Another term which is commonly
associated to Swap is Swaption which is basically
an option on the forward Swap. Similar to a Call
and Put option, a Swaption is of two kinds: a receiver Swaption and a payer Swaption. While on
one hand, in case of a receiver Swaption there is an
option wherein you can receive xed and pay oating, a payer swaption on the other hand is an option
to pay xed and receive oating.
Swaps can basically be categorized
into two types:
Interest rate swap: These basically necessitate swapping only
interest associated cash ows
in the same currency, between
two parties.
Currency swap: In this kind
of swapping, the cash ow
between the two parties includes both principal and interest. Also, the money which
is being swapped is in dierent
currency for both parties.[57]
Some common examples of these derivatives are the following:
56
Arbitrage-free price, meaning that no risk-free profits can be made by trading in these contracts (see
rational pricing)
2. The derivatives market reallocates risk from the people who prefer risk aversion to the people who have
Determining the market price
an appetite for risk.
3. The intrinsic nature of derivatives market associates
them to the underlying Spot market. Due to derivatives there is a considerable increase in trade volumes of the underlying Spot market. The dominant
factor behind such an escalation is increased participation by additional players who would not have otherwise participated due to absence of any procedure
to transfer risk.
5.1.14
Valuation
However, for options and more complex derivatives, pricing involves developing a complex pricing model: understanding the stochastic process of the price of the underlying asset is often crucial. A key equation for the theoretical valuation of options is the BlackScholes formula,
which is based on the assumption that the cash ows from
a European stock option can be replicated by a continuous
buying and selling strategy using only the stock. A simplied version of this valuation technique is the binomial
options model.
OTC represents the biggest challenge in using models
to price derivatives. Since these contracts are not publicly traded, no market price is available to validate the
theoretical valuation. Most of the models results are
input-dependent (meaning the nal price depends heavily on how we derive the pricing inputs).[62] Therefore it
is common that OTC derivatives are priced by Independent Agents that both counterparties involved in the deal
designate upfront (when signing the contract).
5.1.15 Criticisms
Market price, i.e. the price at which traders are willing to buy or sell the contract
Derivatives are often subject to the following criticisms:
5.1. DERIVATIVE
Hidden tail risk
According to Raghuram Rajan, a former chief economist
of the International Monetary Fund (IMF), "... it may
well be that the managers of these rms [investment
funds] have gured out the correlations between the various instruments they hold and believe they are hedged.
Yet as Chan and others (2005) point out, the lessons of
summer 1998 following the default on Russian government debt is that correlations that are zero or negative in
normal times can turn overnight to one a phenomenon
they term phase lock-in. A hedged position can become
unhedged at the worst times, inicting substantial losses
on those who mistakenly believe they are protected.[63]
Risks
See also: List of trading losses
57
UBS AG, Switzerlands biggest bank,
suered a $2 billion loss through unauthorized trading discovered in September
2011.[68]
This comes to a staggering $39.5 billion, the majority in
the last decade after the Commodity Futures Modernization Act of 2000 was passed.
Counter party risk
Some derivatives (especially swaps) expose investors to
counterparty risk, or risk arising from the other party in a
nancial transaction. Dierent types of derivatives have
dierent levels of counter party risk. For example, standardized stock options by law require the party at risk
to have a certain amount deposited with the exchange,
showing that they can pay for any losses; banks that help
businesses swap variable for xed rates on loans may do
credit checks on both parties. However, in private agreements between two companies, for example, there may
not be benchmarks for performing due diligence and risk
analysis.
58
In November 2012, the SEC and regulators from Australia, Brazil, the European Union, Hong Kong, Japan,
Ontario, Quebec, Singapore, and Switzerland met to discuss reforming the OTC derivatives market, as had been
agreed by leaders at the 2009 G-20 Pittsburgh summit
in September 2009.[77] In December 2012, they released
a joint statement to the eect that they recognized that
the market is a global one and rmly support the adoption and enforcement of robust and consistent standards
in and across jurisdictions, with the goals of mitigating
risk, improving transparency, protecting against market
abuse, preventing regulatory gaps, reducing the potential
for arbitrage opportunities, and fostering a level playing
eld for market participants.[77] They also agreed on the
need to reduce regulatory uncertainty and provide market
participants with sucient clarity on laws and regulations
by avoiding, to the extent possible, the application of conicting rules to the same entities and transactions, and
minimizing the application of inconsistent and duplicative rules.[77] At the same time, they noted that complete
harmonization perfect alignment of rules across juris-
5.1. DERIVATIVE
dictions would be dicult, because of jurisdictions differences in law, policy, markets, implementation timing,
and legislative and regulatory processes.[77]
On December 20, 2013 the CFTC provided information
on its swaps regulation comparability determinations.
The release addressed the CFTCs cross-border compliance exceptions. Specically it addressed which entity
level and in some cases transaction-level requirements in
six jurisdictions (Australia, Canada, the European Union,
Hong Kong, Japan, and Switzerland) it found comparable
to its own rules, thus permitting non-US swap dealers,
major swap participants, and the foreign branches of US
Swap Dealers and major swap participants in these jurisdictions to comply with local rules in lieu of Commission
rules.[78]
Reporting
Mandatory reporting regulations are being nalized in
a number of countries, such as Dodd Frank Act in
the US, the European Market Infrastructure Regulations
(EMIR) in Europe, as well as regulations in Hong Kong,
Japan, Singapore, Canada, and other countries.[79] The
OTC Derivatives Regulators Forum (ODRF), a group
of over 40 world-wide regulators, provided trade repositories with a set of guidelines regarding data access to
regulators, and the Financial Stability Board and CPSS
IOSCO also made recommendations in with regard to
reporting.[79]
DTCC, through its Global Trade Repository (GTR)
service, manages global trade repositories for interest
rates, and commodities, foreign exchange, credit, and
equity derivatives.[79] It makes global trade reports to
the CFTC in the U.S., and plans to do the same for
ESMA in Europe and for regulators in Hong Kong, Japan,
and Singapore.[79] It covers cleared and uncleared OTC
derivatives products, whether or not a trade is electronically processed or bespoke.[79][80][81]
5.1.17
Glossary
59
forms, such as credit default swaps, credit linked
notes and total return swaps.
Derivative: A nancial contract whose value is derived from the performance of assets, interest rates,
currency exchange rates, or indexes. Derivative
transactions include a wide assortment of nancial
contracts including structured debt obligations and
deposits, swaps, futures, options, caps, oors, collars, forwards and various combinations thereof.
Exchange-traded derivative contracts: Standardized derivative contracts (e.g., futures contracts and
options) that are transacted on an organized futures
exchange.
[Gross negative fair value: The sum of the fair values of contracts where the bank owes money to
its counter-parties, without taking into account netting. This represents the maximum losses the banks
counter-parties would incur if the bank defaults and
there is no netting of contracts, and no bank collateral was held by the counter-parties.
Gross positive fair value: The sum total of the fair
values of contracts where the bank is owed money
by its counter-parties, without taking into account
netting. This represents the maximum losses a bank
could incur if all its counter-parties default and there
is no netting of contracts, and the bank holds no
counter-party collateral.
High-risk mortgage securities: Securities where the
price or expected average life is highly sensitive to
interest rate changes, as determined by the U.S.
Federal Financial Institutions Examination Council
policy statement on high-risk mortgage securities.
Notional amount: The nominal or face amount that
is used to calculate payments made on swaps and
other risk management products. This amount generally does not change hands and is thus referred to
as notional.
Over-the-counter (OTC) derivative contracts: Privately negotiated derivative contracts that are transacted o organized futures exchanges.
Structured notes: Non-mortgage-backed debt securities, whose cash ow characteristics depend on one
or more indices and / or have embedded forwards or
options.
Total risk-based capital: The sum of tier 1 plus tier
2 capital. Tier 1 capital consists of common shareholders equity, perpetual preferred shareholders equity with noncumulative dividends, retained earnings, and minority interests in the equity accounts
of consolidated subsidiaries. Tier 2 capital consists
of subordinated debt, intermediate-term preferred
stock, cumulative and long-term preferred stock,
and a portion of a banks allowance for loan and lease
losses.
60
5.1.18
Alpari Group
Anyoption
Banc de Binary
Cantor Fitzgerald
CitiFXPro
City Index Group
CMC Markets
Currenex
DBF
EToro
ETX Capital
Finspreads
First Prudential Markets
FXCM
FXdirekt Bank
FXOpen
FXPro
Saxo Bank
Spread Co.
Spreadex
Sucden
TeleTrade
TFI Markets
Thinkorswim
Varen Gold
Wizetrade
Worldspreads
X-Trade Brokers
Zulu Trade
Gain Capital
Henyep
Freight derivative
Ination derivative
HXPM Gold
I-Access Investors
Property derivatives
IDealing
Weather derivative
IG Group
InstaForex
Interactive Brokers
5.1.20 References
Oanda Corporation
OptionsXpress
Pepperstone
[3] Koehler, Christian. The Relationship between the Complexity of Financial Derivatives and Systemic Risk.
Working Paper: 1011.
InterTrader
Marex Spectron
MF Global
MRC Markets
Plus 500
5.1. DERIVATIVE
61
62
[36] Clear and Present Danger; Centrally cleared derivatives.(clearing houses)". The Economist (Economist
Newspaper Ltd.(subscription required)). April 12, 2012.
Retrieved 2013-05-10.
[37] Liu, Qiao; Lejot, Paul (2013). Debt, Derivatives and
Complex Interactions. Finance in Asia: Institutions, Regulation and Policy. Douglas W. Arne. New York: Routledge. p. 343. ISBN 978-0-415-42319-9.
[38] The Budget and Economic Outlook: Fiscal Years 2013 to
2023 (PDF). Congressional Budget Oce. February 5,
2013. Retrieved March 15, 2013.
[39] Swapping bad ideas: A big battle is unfolding over an
even bigger market. The Economist. 2013-04-27. Retrieved 2013-05-10.
[40] World GDP: In search of growth. The Economist
(Economist Newspaper Ltd.). 2011-05-25. Retrieved
2013-05-10.
[41] Sheridan, Barrett (April 2008). 600,000,000,000,000?".
Newsweek Inc. Retrieved 12 May 2013. via HighBeam
(subscription required)
[42] Khullar, Sanjeev (2009). Using Derivatives to Create Alpha. In John M. Longo. Hedge Fund Alpha: A Framework for Generating and Understanding Investment Performance. Singapore: World Scientic. p. 105. ISBN
978-981-283-465-2. Retrieved September 14, 2011.
[43] Lemke and Lins, Soft Dollars and Other Trading Activities,
2:47 - 2:54 (Thomson West, 2013-2014 ed.).
[44] Don M. Chance; Robert Brooks (2010). Advanced
Derivatives and Strategies. Introduction to Derivatives
and Risk Management (8th ed.). Mason, OH: Cengage
Learning. pp. 483515. ISBN 978-0-324-60120-6. Retrieved September 14, 2011.
[45] Shirre, David (2004). Derivatives and leverage.
Dealing With Financial Risk. The Economist. p. 23.
ISBN 1-57660-162-5. Retrieved September 14, 2011.
[46] Peterson, Sam (2010).
The Atlantic.
Theres
a
Derivative
in
Your
Cereal
http://www.
theatlantic.com/business/archive/2010/07/
theres-a-derivative-in-your-cereal/60582/
[47] Chisolm, Derivatives Demystied (Wiley 2004)
[48] Chisolm, Derivatives Demystied (Wiley 2004) Notional
sum means there is no actual principal.
[49] News.BBC.co.uk, How Leeson broke the bank BBC
Economy
[50] Chernenko, Sergey and Faulkender, Michael. The Two
Sides of Derivatives Usage: Hedging and Speculating
with Interest Rate Swaps http://www.rhsmith.umd.edu/
faculty/faulkender/swaps_JFQA_final.pdf
[51] Knowledge@Wharton (2012).
The Changing Use
of Derivatives: More Hedging, Less Speculation
http://knowledge.wharton.upenn.edu/article.cfm?
articleid=709
5.1. DERIVATIVE
[68] UBS Loss Shows Banks Fail to Learn From Kerviel, Leeson. Businessweek. September 15, 2011. Retrieved
March 5, 2013.
[69] Michael Simkovic, Secret Liens and the Financial Crisis
of 2008.. American Bankruptcy Law Journal, Vol. 83,
p. 253. 2009. Retrieved March 5, 2013.
63
Chapter 6
Finance of states
6.1 Public nance
Public nance is the study of the role of the government
in the economy.[1] It is the branch of economics which
assesses the government revenue and government expenditure of the public authorities and the adjustment of one
or the other to achieve desirable eects and avoid undesirable ones.[2]
Government can pay for spending by borrowing (for example, with government bonds), although borrowing is a
method of distributing tax burdens through time rather
than a replacement for taxes. A decit is the dierence
between government spending and revenues. The accumulation of decits over time is the total public debt.
Decit nance allows governments to smooth tax burdens
6.1.1 Overview
over time, and gives governments an important scal polThe proper role of government provides a starting point icy tool. Decits can also narrow the options of successor
for the analysis of public nance. In theory, under cer- governments.
tain circumstances, private markets will allocate goods Public nance is closely connected to issues of income
and services among individuals eciently (in the sense distribution and social equity. Governments can realthat no waste occurs and that individual tastes are match- locate income through transfer payments or by designing with the economys productive abilities). If private ing tax systems that treat high-income and low-income
markets were able to provide ecient outcomes and if households dierently.
the distribution of income were socially acceptable, then
The public choice approach to public nance seeks to exthere would be little or no scope for government. In many
plain how self-interested voters, politicians, and bureaucases, however, conditions for private market eciency
crats actually operate, rather than how they should operare violated. For example, if many people can enjoy the
ate.
same good at the same time (non-rival, non-excludable
consumption), then private markets may supply too little
of that good. National defense is one example of non- 6.1.2 Public nance management
rival consumption, or of a public good.
The purview of public nance is considered to be
threefold: governmental eects on (1) ecient allocation of resources, (2) distribution of income, and (3)
macroeconomic stabilization.
"Market failure" occurs when private markets do not allocate goods or services eciently. The existence of
market failure provides an eciency-based rationale for
collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, and network eects can
cause market failures. Public provision via a government
or a voluntary association, however, is subject to other
ineciencies, termed "government failure.
Under broad assumptions, government decisions about
the ecient scope and level of activities can be eciently
separated from decisions about the design of taxation systems (Diamond-Mirlees separation). In this view, public
64
65
that have suered a loss due to natural disaster.
Likewise, public pension programs transfer wealth
from the young to the old. Other forms of government expenditure which represent purchases of
goods and services also have the eect of changing
the income distribution. For example, engaging in
a war may transfer wealth to certain sectors of society. Public education transfers wealth to families
with children in these schools. Public road construction transfers wealth from people that do not use the
roads to those people that do (and to those that build
the roads).
3. Public debt
Income Security
4. Financial administration
Employment insurance
5. Federal nance
Health Care
6.1.3
Government expenditures
Government operations
Income distribution
Main article: Income distribution
See also: Redistribution (economics)
Income distribution Some forms of government
expenditure are specically intended to transfer income from some groups to others. For example,
governments sometimes transfer income to people
66
are taken into account. Public nance research also analyzes eects of the various types of taxes and types of
borrowing as well as administrative concerns, such as tax
enforcement.
Taxes
Main article: Tax
Taxation is the central part of modern public nance. Its
signicance arises not only from the fact that it is by far
the most important of all revenues but also because of
the gravity of the problems created by the present day tax
burden.[5] The main objective of taxation is raising revenue. A high level of taxation is necessary in a welfare
State to fulll its obligations. Taxation is used as an instrument of attaining certain social objectives i.e. as a
means of redistribution of wealth and thereby reducing
inequalities. Taxation in a modern Government is thus
needed not merely to raise the revenue required to meet
its ever-growing expenditure on administration and social
services but also to reduce the inequalities of income and
wealth. Taxation is also needed to draw away money that
would otherwise go into consumption and cause ination
to rise.[6]
A tax is a nancial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). Taxes could also be
imposed by a subnational entity. Taxes consist of direct
tax or indirect tax, and may be paid in money or as corve
labor. A tax may be dened as a pecuniary burden laid
upon individuals or property to support the government
[ . . .] a payment exacted by legislative authority.[7]
A tax is not a voluntary payment or donation, but an
enforced contribution, exacted pursuant to legislative authority and is any contribution imposed by government
[ . . .] whether under the name of toll, tribute, tallage,
gabel, impost, duty, custom, excise, subsidy, aid, supply,
or other name.[8]
Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected
and outlays are recognized when paid. Some consider all
government liabilities, including future pension payments
and payments for goods and services the government has
contracted for but not yet paid, as government debt. This
approach is called accrual accounting, meaning that obli There are various types of taxes, broadly divided gations are recognized when they are acquired, or acinto two heads direct (which is proportional) and crued, rather than when they are paid. This constitutes
public debt.
indirect tax (which is dierential in nature):
Stamp duty, levied on documents
Excise tax (tax levied on production for sale, or sale,
of a certain good)
Seigniorage
67
ily non market goods and services and the redistribution
of income and wealth, with both activities supported
mainly by compulsory levies on other sectors. The GFSM
2001 disaggregates the general government into subsectors: central government, state government, and local
government (See Figure 1). The concept of general government does not include public corporations. The general government plus the public corporations comprise
the public sector (See Figure 2).
In market-oriented economies with substantial state enterprise, such as in Venezuela, the state-run oil company
PSDVA provides revenue for the government to fund its
operations and programs that would otherwise be prot
for private owners. In various mixed economies, the revenue generated by state-run or state-owned enterprises
are used for various state endeavors; typically the revenue
generated by state and government agencies goes into a Figure 1: General Government (IMF Government Finance
sovereign wealth fund. An example of this is the Alaska Statistics Manual 2001(Washington, 2001) pp.13
Permanent Fund and Singapores Temasek Holdings.
Various market socialist systems or proposals utilize revenue generated by state-run enterprises to fund social dividends, eliminating the need for taxation altogether.
6.1.5
68
general government is responsible for the management of the institutional unit, for the payment or approval of the level of the contributions and of the
benets, independent of its role as a supervisory
body or employer.
Social security fund[14] is a central, state or local institutional unit whose main activity is to provide social
benets. It fulls the two following criteria:
This functional classication allows policy makers to analyze expenditures on categories such as health, education,
social protection, and environmental protection. The nancial statements can provide investors with the necessary information to assess the capacity of a government
to service and repay its debt, a key element determining
sovereign risk, and risk premia. Like the risk of default
of a private corporation, sovereign risk is a function of
the level of debt, its ratio to liquid assets, revenues and
expenditures, the expected growth and volatility of these
revenues and expenditures, and the cost of servicing the
debt. The governments nancial statements contain the
relevant information for this analysis.
by law or regulation (except those about government employees), certain population groups must
take part in the scheme and have to pay contributions;
State government[12] is dened as the separate institutional units that exercise some government functions below those units at central government level and above
those units at local government level, excluding the administration of social security funds.
Local government[13] consists of all types of public administration whose responsibility covers only a local part
of the economic territory, apart from local agencies of
social security funds.
69
[6] http://budget.ap.gov.in/es2k_pf.htm
[7] Blacks Law Dictionary, p. 1307 (5th ed. 1979).
GFS can be accessible through several sources. The International Monetary Fund publishes GFS in two publications: International Financial Statistics and the Govern6.1.8 References
ment Finance Statistics Yearbook. The World Bank gathers information on external debt. On a regional level, the
Anthony B. Atkinson and Joseph E. Stiglitz (1980).
Organization for Economic Co-operation and DevelopLectures in Public Economics, McGraw-Hill Ecoment (OECD) compiles general government account data
nomics Handbook Series
for its members, and Eurostat, following a methodology
compatible with the GFSM 2001, compiles GFS for the
Alan S. Blinder, Robert M. Solow, et al. (1974).
members of the European Union.
The Economics of Public Finance, Brookings Institution. Table of Contents.
6.1.6
See also
Constitutional economics
Eciency dividend
Fiscal incidence
Government budget
Henry George Theorem
Personal nance
Public economics
Public choice
6.1.7
Notes
[1] Gruber, Jonathan (2005). Public Finance and Public Policy. New York: Worth Publications. p. 2. ISBN 0-71678655-9.
[2] Jain, P C (1974). The Economics of Public Finance.
[3] Robert Barro and Vittorio Grilli (1994), European
Macroeconomics, Ch. 1516. Macmillan, ISBN 0-33357764-7.
Greene, Joshua E (2011). Public Finance: An International Perspective. Hackensack, New Jersey:
World Scientic. p. 500. ISBN 978-981-4365-048.
70
6.1.9
External links
Chapter 7
Financial economics
7.1 Financial economics
72
Originating from the ArrowDebreu model is the concept 'Markowitz Bullet', and its upward sloped portion is the ecient
of a state price security (also called an Arrow-Debreu frontier if no risk-free asset is available. With a risk-free asset,
the straight line is the ecient frontier.
security), a contract that agrees to pay one unit of a
numeraire (a currency or a commodity) if a particular
state occurs at a particular time in the future and pays
zero numeraire in all the other states. The price of this
security is the state price of this particular state of the
world, which may be represented by a vector. The state
price vector is the vector of state prices for all states. As
such, any derivatives contract whose settlement value is a
function of an underlying whose value is uncertain at contract date can be decomposed as a linear combination of
its Arrow-Debreu securities, and thus as a weighted sum
of its state prices. Analogously, for a continuous random
variable indicating a continuum of possible states, the
value is found by integrating over the state price density;
see Stochastic discount factor. These concepts are extended to Martingale pricing and the related Risk-neutral
measure.
7.1.2
Resultant models
73
the BlackScholesMerton theory (BSM; often, simply
Black-Scholes) for option pricing an arbitrage-free result.
Briey, and intuitively - and consistent with #Arbitragefree pricing and equilibrium above - the linkage is as
follows.[11] If prices of nancial assets are (broadly) correct, i.e. ecient, then deviations from these (equilibrium) values could not last for long; correspondingly,
prices would be expected to change (only) on the arrival
of new information:[12] the Random walk hypothesis. Under these conditions investors can then be assumed to act
rationally: their investment decision must be calculated
or a loss is sure to follow. Also, where an arbitrage opportunity presents itself, then investors will exploit it, reinforcing this equilibrium. Here, as under the certaintycase above, the specic assumption as to pricing is that
prices are calculated as the present value of expected future dividends,[12] as based on currently available information. What is required though is a theory for determining the appropriate discount rate given this uncertainty:
this is provided by the MPT and its CAPM. Relatedly, rationality in the sense of arbitrage-exploitation gives
rise to Black-Scholes; option values here ultimately consistent with the CAPM.
74
7.1.3
Extensions
As regards derivative pricing, the Binomial options pricing model provides a discretized version of BlackScholes, useful for the valuation of American styled options; discretized models of this type are built using stateprices (as above), while exotic derivatives although modeled in continuous time via Monte Carlo methods for option pricing are also priced using risk neutral expected
value. Various other numeric techniques have also been
developed. The theoretical framework too has been extended such that Martingale pricing is now the standard
approach. Since the work of Breeden and Litzenberger
in 1978,[15] a large number of researchers have used options to extract ArrowDebreu prices for a variety of applications in nancial economics. Developments relating
to complexities in return and / or volatility are discussed
below; see also Mathematical nance#Derivatives pricImplied volatility surface. The Z-axis represents implied volatility
ing: the Q world.
in percent, and X and Y axes represent the option delta, and the
Derivative models for various other underlyings and ap- days to maturity.
plications have also been developed, all departing from
the same logic. Beginning with Oldrich Vasicek, various Short rate models, as well as the HJM and BGM
See
also:
Capital
asset
pricing
forward rate-based techniques, allow for an extension to
model#Problems of CAPM; Modern portxed income- and interest rate derivatives. (The Vasicek
BlackScholes
folio theory#Criticisms;
and CIR models are equilibrium-based, while HoLee
model#Criticism;
Financial mathematand subsequent models are based on arbitrage-free pricics#Criticism; List of unsolved problems in
ing.) Real options valuation allows that option holders can
economics#Financial economics;.[17]
75
distributed are fundamental. Empirical evidence, however, suggests that these assumptions may not hold (see
Kurtosis risk, Skewness risk, Long tail) and that in practice, traders, analysts and particularly risk managers frequently modify the standard models (see Model risk).
In fact, Benot Mandelbrot had discovered already in the
1960s that changes in nancial prices do not follow a
Gaussian distribution, the basis for much option pricing theory, although this observation was slow to nd
its way into mainstream nancial economics. Financial
models with long-tailed distributions and volatility clustering have been introduced to overcome problems with
the realism of classical nancial models; jump diusion
models allow for (option) pricing incorporating jumps
in the spot price. Risk managers, similarly, complement (or substitute) the standard value at risk models
with Historical simulations, volatility clustering, mixture
models, Principal component analysis and extreme value
theory.[20] For further discussion see Fat-tailed distribution#Applications in economics.
76
7.1.5
See also
Category:Finance theories
[12] Shiller, Robert J. (2003). From Ecient Markets Theory to Behavioral Finance (PDF). Journal of Economic
Perspectives 17 (1 (Winter 2003)): 83104.
Category:Financial economists
[14] See Rubinstein parts IVa and IVb, under External links.
Financial modeling
7.1.6
References
7.1.7 Bibliography
Financial economics
Roy E. Bailey (2005). The Economics of Financial Markets. Cambridge University Press. ISBN
0521612802.
77
Brian Kettell (2002). Economics for Financial Markets. Butterworth-Heinemann. ISBN 978-0-75065384-8.
Zvi Bodie, Robert C. Merton and David Cleeton (2008). Financial Economics (2nd Edition).
Prentice Hall. ISBN 0131856154.
Yvan Lengwiler (2006). Microfoundations of Financial Economics: An Introduction to General Equilibrium Asset Pricing. Princeton University Press.
ISBN 0691126313.
James Bradeld (2007). Introduction to the Economics of Financial Markets. Oxford University
Press. ISBN 978-0-19-531063-4.
Jaka Cvitani and Fernando Zapatero (2004). Introduction to the Economics and Mathematics of
ISBN 978Financial Markets.
MIT Press.
0262033206.
George M. Constantinides, Milton Harris, Ren M.
Stulz (editors) (2003). Handbook of the Economics
of Finance. Elsevier. ISBN 0444513639.
Keith Cuthbertson, Dirk Nitzsche (2004). Quantitative Financial Economics: Stocks, Bonds and Foreign
Exchange. Wiley. ISBN 0470091711.
Jean-Pierre Danthine, John B. Donaldson (2005).
Intermediate Financial Theory (2nd Edition).
Academic Press. ISBN 0123693802.
Stephen F. LeRoy and Jan Werner (2000). Principles of Financial Economics. Cambridge University
Press. ISBN 0521586054.
Leonard C. MacLean, and William T. Ziemba
(2013). Handbook of the Fundamentals of Financial Decision Making. World Scientic. ISBN
9814417343.
Frederic S. Mishkin (2012). The Economics of
Money, Banking, and Financial Markets (3rd Edition). Prentice Hall. ISBN 0132961970.
Harry H. Panjer, ed. (1998). Financial Economics
with Applications. Actuarial Foundation. ISBN
0938959484.
Richard Roll (series editor) (2006). The International Library of Critical Writings in Financial Economics. Cheltenham: Edward Elgar Publishing.
Tomas Bjrk (2009). Arbitrage Theory in Continuous Time (3rd Edition). Oxford University Press.
ISBN 019957474X.
Thorsten Hens and Marc Oliver Rieger (2010). Financial Economics: A Concise Introduction to Classical and Behavioral Finance. Springer. ISBN
3540361464.
Chi-fu Huang and Robert H. Litzenberger (1998).
Foundations for Financial Economics. Prentice
Hall. ISBN 0135006538.
Jonathan E. Ingersoll (1987). Theory of Financial
Decision Making. Rowman & Littleeld. ISBN
0847673596.
Robert A. Jarrow (1988). Finance theory. Prentice
Hall. ISBN 0133148653.
Chris Jones (2008).
Financial Economics.
Routledge. ISBN 0415375851.
Darrell Due (2001). Dynamic Asset Pricing Theory (3rd Edition). Princeton University Press. ISBN
069109022X.
Edwin J. Elton, Martin J. Gruber, Stephen J. Brown,
William N. Goetzmann (2014). Modern Portfolio Theory and Investment Analysis (9th Edition).
Wiley. ISBN 1118469941.
Robert A. Haugen (2000). Modern Investment Theory (5th Edition). Prentice Hall. ISBN 0130191701.
Mark S. Joshi, Jane M. Paterson (2013). Introduction to Mathematical Portfolio Theory. Cambridge
University Press. ISBN 1107042313.
David G. Luenberger (2013). Investment Science
(2nd Edition). Oxford University Press. ISBN
0199740089.
78
Harry M. Markowitz (1991). Portfolio Selection:
Ecient Diversication of Investments (2nd Edition). Wiley. ISBN 1557861080.
Frank Milne (2003). Finance Theory and Asset
Pricing (2nd Edition). Oxford University Press.
ISBN 0199261075.
George Pennacchi (2007). Theory of Asset Pricing.
Prentice Hall. ISBN 032112720X.
Mark Rubinstein (2006). A History of the Theory of
Investments. Wiley. ISBN 0471770566.
William F. Sharpe (1999). Portfolio Theory and
Capital Markets: The Original Edition. McGrawHill. ISBN 0071353208.
Corporate nance
Jonathan Berk, Peter DeMarzo (2013). Corporate
Finance (3rd Edition). Pearson. ISBN 0132992477.
Richard Brealey; Stewart Myers; Franklin Allen
(2013). Principles of Corporate Finance. McgrawHill. ISBN 978-0078034763.
Aswath Damodaran (1996). Corporate Finance:
Theory and Practice.
Wiley.
ISBN 9780471076803.
Joo Amaro de Matos (2001). Theoretical Foundations of Corporate Finance. Princeton University
Press. ISBN 9780691087948.
Joseph Ogden, Frank C. Jen, Philip F. O'Connor
(2002). Advanced Corporate Finance. Prentice
Hall. ISBN 978-0130915689.
Joel M. Stern, ed. (2003). The Revolution in Corporate Finance (4th Edition). Wiley-Blackwell. ISBN
Links and portals
9781405107815.
Jean Tirole (2006). The Theory of Corporate
ISBN
Finance.
Princeton University Press.
0691125562.
Ivo Welch (2014). Corporate Finance (3rd Edition).
ISBN 978-0-9840049-1-1.
Gordan
79
Chapter 8
Financial mathematics
8.1 Financial mathematics
Mathematical nance, also known as quantitative nance, is a eld of applied mathematics, concerned with
nancial markets. Generally, mathematical nance will
derive and extend the mathematical or numerical models
without necessarily establishing a link to nancial theory, taking observed market prices as input. Mathematical consistency is required, not compatibility with
economic theory. Thus, for example, while a nancial
economist might study the structural reasons why a company may have a certain share price, a nancial mathematician may take the share price as a given, and attempt to use stochastic calculus to obtain the corresponding value of derivatives of the stock (see: Valuation of
options; Financial modeling). The fundamental theorem
of arbitrage-free pricing is one of the key theorems in
mathematical nance, while the BlackScholes equation
and formula are amongst the key results.[1]
8.1.1
History: Q versus P
80
81
With time, the mathematics has become more sophisticated. Thanks to Robert Merton and Paul Samuelson,
one-period models were replaced by continuous time,
Brownian-motion models, and the quadratic utility function implicit in meanvariance optimization was replaced
by more general increasing, concave utility functions.[6]
Furthermore, in more recent years the focus shifted toward estimation risk, i.e., the dangers of incorrectly
assuming that advanced time series analysis alone can
provide completely accurate estimates of the market
parameters.[7]
8.1.2 Criticism
Risk and portfolio management aims at modeling the statistically derived probability distribution of the market
prices of all the securities at a given future investment
horizon.
This real probability distribution of the market prices
is typically denoted by the blackboard font letter " P ",
as opposed to the risk-neutral probability " Q " used in
derivatives pricing.
Based on the P distribution, the buy-side community
takes decisions on which securities to purchase in order
to improve the prospective prot-and-loss prole of their
positions considered as a portfolio.
The quantitative theory of risk and portfolio management started with the mean-variance framework of Harry
Markowitz (1952), who caused a shift away from the concept of trying to identify the best individual stock for investment. Using a linear regression strategy to understand
and quantify the risk (i.e. variance) and return (i.e. mean)
of an entire portfolio of stocks, bonds, and other securities, an optimization strategy was used to choose a portfolio with largest mean return subject to acceptable levels of
variance in the return. Next, breakthrough advances were
made with the Capital Asset Pricing Model (CAPM) and
the arbitrage pricing theory (APT) developed by Treynor
(1962), Mossin (1966), William F. Sharpe (1964), Lint- In general, modeling the changes by distributions with nite variance is, increasingly, said to be inappropriate.[11]
ner (1965) and Ross (1976).
In the 1960s it was discovered by Benot Mandelbrot that
For their pioneering work, Markowitz and Sharpe, along changes in prices do not follow a Gaussian distribution,
with Merton Miller, shared the 1990 Nobel Memo- but are rather modeled better by Lvy alpha-stable distririal Prize in Economic Sciences, for the rst time ever butions.[12] The scale of change, or volatility, depends on
awarded for a work in nance.
the length of the time interval to a power a bit more than
The portfolio-selection work of Markowitz and Sharpe 1/2. Large changes up or down are more likely than what
introduced mathematics to investment management. one would calculate using a Gaussian distribution with an
82
8.1.3
8.1.4
See also
Computational nance
Quantitative Behavioral Finance
Derivative (nance), list of derivatives topics
Modeling and analysis of nancial markets
Technical analysis
International Swaps and Derivatives Association
Fundamental nancial concepts - topics
Model (economics)
List of nance topics
List of economics topics, List of economists
List of accounting topics
Statistical Finance
Brownian model of nancial markets
Master of Mathematical Finance
Financial economics
8.1.5
Notes
8.1.6 References
Harold Markowitz, Portfolio Selection, Journal of
Finance, 7, 1952, pp. 7791
William F. Sharpe, Investments, Prentice-Hall, 1985
Attilio Meucci, P versus Q: Dierences and Commonalities between the Two Areas of Quantitative Finance, GARP Risk Professional, February 2011, pp.
4144
Nicole El Karoui, The Future of Financial Mathematics, ParisTech Review, September 2013
Chapter 9
Experimental nance
9.1 Experimental nance
The goals of experimental nance are to understand human and market behavior in settings relevant to nance.
Experiments are synthetic economic environments created by researchers specically to answer research questions. This might involve, for example, establishing different market settings and environments to observe experimentally and analyze agents behavior and the resulting characteristics of trading ows, information diusion and aggregation, price setting mechanism and returns
processes.
Financial economics has one of the most detailed and updated observational data available of all branches of economics. Consequently, nance is characterized by strong
empirical traditions. Lots of analysis is done on data from
stock exchanges including bids, asks, transaction prices,
volume, etc. There is also data available from information
services on actions and events that may inuence markets.
Data from these sources is not able to report on expectations, on which theory of nancial markets is built. In
experimental markets the researcher is able to know expectations, and control fundamental values, trading institutions, and market parameters such as available liquidity
and the total stock of the asset. This gives the researcher
the ability to know the price and other predictions of
alternative theories. This creates the opportunity to do
powerful tests on the robustness of theories which were
not possible from eld data, since there is little knowledge
on the parameters and expectations from eld data.[7]
Fields to which experimental methods have been applied include corporate nance, asset pricing, nancial econometrics, international nance, personal nancial decision-making, macro-nance, banking and nancial intermediation, capital markets, risk management
and insurance, derivatives, quantitative nance, corporate governance and compensation, investments, market
mechanisms, SME and micronance and entrepreneurial
nance.[1] Researchers in experimental nance can study
to what extent existing nancial economics theory makes
9.1.3 Advantages
valid predictions and attempt to discover new principles
on which theory can be extended.
Financial data analysis is based on data drawn from setExperimental nance is a branch of experimental eco- tings created for a purpose other than answering a spenomics and its most common use lies in the eld of cic research question. This results in the situation where
behavioral nance.
any interpretation of the results may be challenged since
it ignores other variables that have changed. Traditional
data analysis issues include omitted-variables biases, selfselection biases, unobservable independent variables, and
unobservable dependent variables.[8]
9.1.1
History
In 1948, Chamberlin reported results of the rst market experiment.[2] Since then the acceptability, recognition, role, and methods of experimental economics
have evolved. From the early 1980s on a similar pattern emerged in experimental nance.[3] The foundational
work in experimental nance was the work of Forsythe,
Palfrey and Plott (1980),[4] Plott and Sunder (1982),[5]
and Smith, Suchanek and Williams (1988).[6]
83
84
Natural experiments
Experimentalists can create experimental settings themselves. This makes them able to observe all variables.
Traditional data analysis may not be able to observe some
variables, but sometimes experimenters cannot directly
elicit certain information from subjects either. Without
directly knowing a certain independent variable, good
experimental design can create measures that to a large
extent reects the unobservable independent variable and
the problem is therefore avoided.
9.1.4
Types of experiments
Laboratory experiments
Laboratory experiments are the most common form of
experimentation. Here the idea is to construct a highly
controlled setting in a laboratory.[8] The use of lab experiments increased due to growing interest in issues such as
economic cooperation, trust, and neuroeconomics.[9] In
this type of experiments, treatment is assigned randomly
to a group of individuals in order to compare their economic actions and behavior to an untreated control group
within the articial laboratory environment. The ability
to control the variables in the experiment provides for
more accurate assessment of causality.[8]
Security markets can aggregate and disseminate information (there are ecient markets), but this process is less eective as the information becomes less
widely held and the number of information components that must be aggregated increases.
But this is not always the case (some of them are
inecient).
When information dissemination occurs, it is rarely
perfect or instantaneous. Learning takes time.
More information is not always better from the point
of view of the individual trader. Only those insiders who are much better informed than others can
outperform other traders.
Markets for longer-lived assets have a strong tendency to generate price bubbles and crashes, prolonged deviations from fundamental values.
Emotions of traders play a role in generating bubbles
in experimental asset markets.
Asset mispricing has been largely associated with
trader overcondence.
Prices as well as bids, oers, timing, etc., convey information. There are many channels for information
ow.
Well-functioning derivative markets can help to improve primary markets eciency.
9.1.6
See also
Experimental economics
Behavioral economics
Game theory
9.1.7
References
[1] Lucey, Brian M. (August 26, 2013). A New Journal Journal of Behavioral and Experimental Finance. http://brianmlucey.wordpress.com/2013/08/26/
a-new-journal-journal-of-behavioral-and-experimental-finance/
[2] Chamberlin, Edward H. (1948). An Experimental Imperfect Market. Journal of Political Economy, 56(2), 95108.
[3] Sunder, Shyam.
(June, 2013).
Experimental Finance:
Responsibilities of Coming of
Age.
Society for Experimental Finance,
Tilburg University,
Tilburg,
The Netherlands.
http://faculty.som.yale.edu/shyamsunder/Research/
Experimental%20Economics%20and%20Finance/
Presentations%20and%20Working%20Papers/
Tilburg-Jun2013/SEFAddressTilburgJune2013.ppt
[4] Forsythe, R., Palfrey, T. and Plott, C. R. (1982). Asset
Valuation in an Experimental Market. Econometrica,
50(3), 537-568.
[5] Plott, C. R. and Sunder, S. (1982). Eciency of Experimental Security Markets with Insider Information: An
Application of Rational Expectations Models, Journal of
Political Economy, 90(4), 663-698.
[6] Smith, V. L., Suchanek, G. and Williams, A. (1988).
Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets, Econometrica, 56(5),
1119-1151.
[7] Sunder, Shyam. (2007). What have we learned
from experimental nance?". Developments on Experimental Economics. Springer Berlin Heidelberg.
http://link.springer.com/chapter/10.1007/
91-100.
978-3-540-68660-6_6#
[8] Bloomeld, Robert and Anderson, Alyssa. Experimental
nance. In Baker, H. Kent, and Nofsinger, John R., eds.
Behavioral nance: investors, corporations, and markets.
Vol. 6. John Wiley & Sons, 2010. pp. 113-131. ISBN
978-0470499115
[9] Sauter, Wolf N. (2010). Essays on Natural Experiments
in Behavioral Finance and Trade. Doctoral dissertation,
Ludwig-Maximilians University, Mnchen.
[10] Noussair, Charles N. and Tucker, Steven. (2013).
Experimental research on asset pricing. Journal of Economic Surveys, 27(3), 554-569.
85
Chapter 10
Behavioral nance
10.1 Behavioral nance
Behavioral economics and the related eld, behavioral nance, study the eects of psychological, social, cognitive, and emotional factors on the economic
decisions of individuals and institutions and the consequences for market prices, returns, and the resource
allocation.[1] Behavioral economics is primarily concerned with the bounds of rationality of economic
agents. Behavioral models typically integrate insights
from psychology, neuroscience and microeconomic theory; in so doing, these behavioral models cover a range of
concepts, methods, and elds.[2][3] Behavioral economics
is sometimes discussed as an alternative to neoclassical
economics.
Behavioral nance highlights ineciencies such as under or over-reactions to information as causes of market
trends and in extreme cases of bubbles and crashes. Such
reactions have been attributed to limited investor attention, overcondence, overoptimism, mimicry (herding
instinct) and noise trading. Technical analysts consider
behavioral nance, to be behavioral economics academic cousin and to be the theoretical basis for technical
analysis.[6]
87
Thalers model of price reactions to informa- and social preferences.[22][23] As a research program, the
tion, with three phases, underreaction-adjustment- subject is a development of the last three decades.[24]
overreaction, creating a price trend
One characteristic of overreaction is that average returns following announcements of good
news is lower than following bad news. In other
words, overreaction occurs if the market reacts
too strongly or for too long to news, thus requiring adjustment in the opposite direction. As a
result, outperforming assets in one period are
likely to underperform in the following period.
This also applies to customers irrational purchasing habits.[13]
The stock image coecient
Criticisms Critics such as Eugene Fama typically support the ecient-market hypothesis. They contend that
behavioral nance is more a collection of anomalies than
a true branch of nance and that these anomalies are either quickly priced out of the market or explained by
appealing to market microstructure arguments. However, individual cognitive biases are distinct from social
biases; the former can be averaged out by the market,
while the other can create positive feedback loops that
drive the market further and further from a "fair price"
equilibrium. Similarly, for an anomaly to violate market eciency, an investor must be able to trade against it
and earn abnormal prots; this is not the case for many
anomalies.[14]
A specic example of this criticism appears in some explanations of the equity premium puzzle. It is argued that
the cause is entry barriers (both practical and psychological) and that returns between stocks and bonds should
equalize as electronic resources open up the stock market to more traders.[15] In reply, others contend that most
personal investment funds are managed through superannuation funds, minimizing the eect of these putative entry barriers. In addition, professional investors and fund
managers seem to hold more bonds than one would exLabor supply The typical laboratory environment to
pect given return dierentials.
study labor supply in pigeons is set up as follows. Pigeons are rst deprived of food. Since the animals are
Behavioral game theory
hungry, food becomes highly desired. The pigeons are
placed in an operant conditioning chamber and through
Main article: Behavioral game theory
orienting and exploring the environment of the chamber
they discover that by pecking a small disk located on one
Behavioral game theory analyzes interactive strategic side of the chamber, food is delivered to them. In eect,
decisions and behavior using the methods of game pecking behavior becomes reinforced, as it is associated
theory,[16] experimental economics, and experimental with food. Before long, the pigeon pecks at the disk (or
psychology. Experiments include testing deviations stimulus) regularly.
from typical simplications of economic theory such as
the independence axiom[17] and neglect of altruism,[18]
fairness,[19] and framing eects.[20] On the positive side,
the method has been applied to interactive learning[21]
88
rate of food delivery and the type of food delivered (some now, or wait until the experimenter alters the amount of
foods are more desirable than others).
food presented. In this circumstance, the experimenter
Economic behavior similar to that observed in humans is can either increase or decrease the amount of food given.
discovered when the hungry pigeons stop working/work Thus, this experimental setup allows the researchers to
less when the reward is reduced. Researchers argue that look at the gambling behavior of the animals. The experthis is similar to labor supply behavior in humans. That is imenters can therefore ask the following questions: will
like humans (who, even in need, will only work so much the monkey take the sure amount of food? Will the monfor a given wage) the pigeons demonstrate decreases in key gamble by waiting until the experimenter changes
the amount of food present? Does the decision of the anpecking (work) when the reward (value) is reduced.[27]
imal depend on the circumstances? Results indicate that
the monkeys are risk-averse: they prefer to take the initial
Demand In human economics, a typical demand curve amount of food than wait for the experimenter to change
has negative slope. This means that as the price of a cer- the amount presented.
tain good increases, the amount that consumers are will- The experimenters introduce several other manipulaing to purchase decreases. Researchers studying the de- tions, including changing the allocated budget, changmand curves of non-human animals, such as rats, also nd ing the cost of certain items, changing the items themdownward slopes.
selves. Specically, the researchers found an increase in
Researchers have studied demand in rats in a manner distinct from studying labor supply in pigeons. Specically,
say we have experimental subjects, rats, in an operant
chamber and we require them to press a lever to receive a
reward. The reward can be either food (reward pellets),
water, or a commodity drink such as cherry cola. Unlike previous pigeon studies, where the work analog was
pecking and the monetary analog was reward, in the studies on demand in rats, the monetary analog is bar pressing. Under these circumstances, the researchers claim
that changing the number of bar presses required to obtain a commodity item is analogous to changing the price
of a commodity item in human economics.[29]
10.1.2 History
During the classical period, microeconomics was closely
linked to psychology. For example, Adam Smith wrote
The Theory of Moral Sentiments, which proposed psychological explanations of individual behavior, including concerns about fairness and justice,[31] and Jeremy
89
Prospect theory
In 1979, Kahneman and Tversky wrote Prospect theory:
An Analysis of Decision Under Risk, an important paper
that used cognitive psychology to explain various divergences of economic decision making from neo-classical
theory.[37] Prospect theory has two stages, an editing stage
and an evaluation stage.
In the editing stage, risky situations are simplied using various heuristics of choice. In the evaluation phase,
risky alternatives are evaluated using various psychological principles that include the following:
(1) Reference dependence: When evaluating outcomes, the decision maker has in mind a reference
level. Outcomes are then compared to the reference point and classied as gains if greater than
the reference point and losses if less than the reference point.
(2) Loss aversion: Losses bite more than equivalent
gains. In their 1979 paper in Econometrica, Kahneman and Tversky found the median coecient of
loss aversion to be about 2.25, i.e., losses bite about
2.25 time more than equivalent gains.
(3) Non-linear probability weighting: Evidence
indicates that decision makers overweight small
probabilities and underweight large probabilities
this gives rise to the inverse-S shaped probability
weighting function.
(4) Diminishing sensitivity to gains and losses: As
the size of the gains and losses relative to the reference point increase in absolute value, the marginal
eect on the decision makers utility or satisfaction
falls.
90
of the theory. Other developments include a conference at the University of Chicago,[38] a special behavioral economics edition of the Quarterly Journal of Economics ('In Memory of Amos Tversky') and Kahnemans 2002 Nobel for having integrated insights from
psychological research into economic science, especially
concerning human judgment and decision-making under
uncertainty.[39]
Intertemporal choice
10.1.3 Criticisms
Critics of behavioral economics typically stress the
rationality of economic agents.[45] They contend that experimentally observed behavior has limited application to
market situations, as learning opportunities and competition ensure at least a close approximation of rational behavior.
Others note that cognitive theories, such as prospect theory, are models of decision making, not generalized economic behavior, and are only applicable to the sort of
The pattern can actually be explained through models of once-o decision problems presented to experiment parsubadditive discounting which distinguishes the delay and ticipants or survey respondents.
interval of discounting: people are less patient (per-time- Traditional economists are also skeptical of the experunit) over shorter intervals regardless of when they occur. imental and survey-based techniques which behavioral
Much of the recent work on intertemporal choice indi- economics uses extensively. Economists typically stress
cates that discounting is a constructed preference. Dis- revealed preferences over stated preferences (from surcounting is inuenced greatly by expectations, framing, veys) in the determination of economic value. Experifocus, thought listings, mood, sign, glucose levels, and the ments and surveys are at risk of systemic biases, strategic
scales used to describe what is discounted. Some promi- behavior and lack of incentive compatibility.
nent researchers question whether discounting, the maRabin (1998)[46] dismisses these criticisms, claiming that
jor parameter of intertemporal choice, actually describes
consistent results are typically obtained in multiple situwhat people do when they make choices with future conations and geographies and can produce good theoretical
sequences. Considering the variability of discount rates,
insight. Behavioral economists have also responded to
this may be the case.
these criticisms by focusing on eld studies rather than
lab experiments. Some economists see a fundamental
schism between experimental economics and behavioral
Other areas of research
economics, but prominent behavioral and experimental
Other branches of behavioral economics enrich the model economists tend to share techniques and approaches in
of the utility function without implying inconsistency in answering common questions. For example, behavioral
preferences. Ernst Fehr, Armin Falk, and Matthew Rabin economists are actively investigating neuroeconomics,
studied "fairness", "inequity aversion", and "reciprocal al- which is entirely experimental and cannot yet be veried
truism", weakening the neoclassical assumption of per- in the eld.
fect selshness. This work is particularly applicable to
wage setting. Work on intrinsic motivation by Gneezy
and Rustichini and on identity by Akerlof and Kranton assumes agents derive utility from adopting personal
and social norms in addition to conditional expected utility. According to Aggarwal (2014), in addition to behavioral deviations from rational equilibrium, markets are
Other proponents of behavioral economics note that neoclassical models often fail to predict outcomes in real
world contexts. Behavioral insights can inuence neoclassical models. Behavioral economists note that these
revised models not only reach the same correct predictions as the traditional models, but also correctly predict
some outcomes where the traditional models failed.
91
10.1.4
Notable theorists
Economics
Uri Gneezy[50]
B. Douglas Bernheim [51]
Colin Camerer
Ernst Fehr
Simon Gchter
Armin Falk
George Loewenstein
Urs Fischbacher
Matthew Rabin
Reinhard Selten
Herbert A. Simon
Vernon L. Smith
Larry Summers
Michael Taillard
Drazen Prelec
Paul Slovic
Amos Tversky
Finance
Malcolm Baker
Nicholas Barberis
Gunduz Caginalp
David Hirshleifer
Andrew Lo
Michael Mauboussin
Terrance Odean
Richard L. Peterson
Charles Plott
Hersh Shefrin
Robert Shiller
Richard Thaler
Andrei Shleifer
John Quiggin
Richard Thaler
Margaret McConne
Robert Vishny
Werner De Bondt
Werner De Bondt
92
10.1.5
See also
10.1.6 Notes
Behavioralism
[2] Search of behavioural economics at (2008) The New Palgrave Dictionary of Economics Online.
Behavioral nance
Behavioral operations research
Cognitive bias
Cognitive psychology
[3] Elizabeth A. Minton, Lynn R. Khale (2014). Belief Systems, Religion, and Behavioral Economics. New York:
Business Expert Press LLC. ISBN 978-1-60649-704-3.
[4] http://leconcurrentialiste.com/2014/04/23/
behavioral-economics-in-u-s-antitrust-scholarly-papers/
[5] Shefrin 2002
Conrmation bias
Cultural economics
Culture change
Economic sociology
Emotional bias
Experimental economics
Experimental nance
Fuzzy-trace theory
Habit (psychology)
Hindsight bias
[13] Tang, David (6 May 2013). Why People Wont Buy Your
Product Even Though Its Awesome. Flevy. Retrieved 31
May 2013.
Homo economicus
Homo reciprocans
Neuroeconomics
Observational techniques
[19] H. Peyton Young (2008). social norms, The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
Praxeology
[20] Camerer, Colin (1997). Progress in behavioral game theory. Journal of Economic Perspectives (Caltech) 11 (4):
172. doi:10.1257/jep.11.4.167. Pdf version.
Rationality
Repugnancy costs
Socioeconomics
Socionomics
[21]
William H. Sandholm (2008). learning and evolution in games: an overview, The New Palgrave
Dictionary of Economics, 2nd Edition. Abstract.
* Teck H. Ho (2008). Individual learning in
games, The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
93
Antonio (2008).
The New Palgrave
94
10.1.7
References
Ainslie, G. (1975). Specious Reward: A Behavioral /Theory of Impulsiveness and Impulse Control. Psychological Bulletin 82 (4): 463496.
doi:10.1037/h0076860. PMID 1099599.
Barberis, N.; Shleifer, A.; Vishny, R. (1998). A
Model of Investor Sentiment. Journal of Financial
Economics 49 (3): 307343. doi:10.1016/S0304405X(98)00027-0. Archived from the original on
20 April 2008. Retrieved 2008-04-25.
Becker, Gary S., Gary S. (1968). Crime and
Punishment: An Economic Approach.
The
Journal of Political Economy 76 (2): 169217.
doi:10.1086/259394.
Benartzi, Shlomo; Thaler, Richard H. (1995). Myopic Loss Aversion and the Equity Premium Puzzle. The Quarterly Journal of Economics (The
MIT Press) 110 (1): 7392. doi:10.2307/2118511.
JSTOR 2118511.
Cunningham, Lawrence A. (2002). Behavioral Finance and Investor Governance. Washington &
Lee Law Review 59: 767. doi:10.2139/ssrn.255778.
ISSN 1942-6658.
Diamond, Peter A., and Hannu Vartiainen, ed.
(2007). Behavioral Economics and its Applications.
Description and preview.
Daniel, K.; Hirshleifer, D.; Subrahmanyam, A.
(1998). Investor Psychology and Security Market
Under- and Overreactions. Journal of Finance 53
(6): 18391885. doi:10.1111/0022-1082.00077.
Garai Laszlo. Identity Economics An Alternative
Economic Psychology. 19902006.
E McGaughey, 'Behavioural Economics and Labour
Law' (2014) SSRN
Hens, Thorsten; Bachmann, Kremena (2008).
Behavioural Finance for Private Banking. Wiley Finance Series. ISBN 0-470-77999-3.
Hogarth, R. M.; Reder, M. W. (1987). Rational
Choice: The Contrast between Economics and Psychology. Chicago: University of Chicago Press.
ISBN 0-226-34857-1.
External links
95
Chapter 11
11.1.1
Basic principles
11.1.2
Business models
97
Property Exchange International (IPXI), headquar- 11.1.4 Government, societies, think tanks,
tered in Chicago, will begin operations as the worlds
and other non-prots
rst stock exchange with an intellectual property focus.
On June 23, 2008, the United States National Academies
hosted a one-day conference in Washington, D.C. enti Investment Research Firms: Companies that pro- tled Intangible Assets: Measuring and Enhancing Their
vide specic advice to investors on intellectual prop- Contribution to Corporate Value and Economic Growth.
erty issues. Recently, hedge fund managers have The Intangible Asset Finance Society provides a forum
been hiring patent attorneys to follow and handicap for nance, innovation, legal and management profesoutcomes in high-stakes patent cases.
sionals to discover better ways to create, capture and preserve the value of intangible assets.
11.1.3
Signicant transactions
The Athena Alliance is a non-prot organization dedicated to public education and research on the emerg 1997: David Bowie securitizes the future royalty ing global information economy. On April 16, 2008 it
revenues earned from his pre-1990 music catalogue published[9] a widely circulated working paper on the
by issuing Bowie Bonds.
topic of intangible asset nance.
2000: BioPharma Royalty Trust completes the $115
million securitization of a single Yale patent with 11.1.5 See also
claims covering Stavudine, which is a reverse transcriptase inhibitor and the active ingredient in the 11.1.6 References
drug Zerit. This was the rst publicly rated patent
securitization in the U.S. At the time of the deal, [1] A Trillion Dollars A Year In Intangible Investment,
Leonard Nakamura in Intangible Assets: Values, MeaBristol Myers Squibb had the exclusive rights to dissures and Risks at 28, Hand & Lev, Oxford University
tribute Zerit in the U.S. Not long after closing slow
Press (2003).
sales of Zerit along with an accounting scandal at
Bristol Myers Squibb triggered the accelerated and [2] Gio Wiederhold; Valuing intangible Capital, Multinationals and Taxhavens; Springer Verlag, 2013.
premature amortization of the transaction. Many
observers believe that this deal was ultimately un[3] A sellers market, The Deal, September 5, 2008
successful because of a lack of diversication as it
[4] Avoiding Transaction Peril, Heller et al., in From Ideas
involved a single patent and a single licensee.
2005: UCC Capital Corporation securitization of
BCBG Max Azria's royalty receivables generated
from worldwide intellectual property rights worth
$53 million. This transaction is recognized as the
rst whole company securitization involving primarily intangible assets. UCC Capital Corporation
was founded by Robert W. D'Loren, and was acquired by NexCen Brands, Inc. in 2006. NexCen
sold substantially all of its assets to Levine Leichtman Capital Partners in 2010.[7]
2005: Ocean Tomo holds its rst live IP auction. 11.1.7 Further reading
Although proceeds from the rst auction were un Rembrandts In the Attic: Unlocking the Hidden
remarkable, the relative success of the Ocean Tomo
Value of Patents
auctions that followed showed that the live auction
is a reasonably viable business model for monetiz When Balance Sheets Collide With the New Econing intellectual property.
omy, New York Times, September 9, 2007
2006: Marvel Entertainment's lm rights securitization in conjunction with Ambac Financial Group to
provide a triple-A nancial guarantee on a credit facility for Marvel backed by a slate of 10 lms to be
produced by Marvel Studios and intellectual property related to some of Marvels most popular comic
book characters.[8]
Chapter 12
98
12.1. TEXT
99
Jem147, Utility Monster, TobeBot, Kevinsleem, LogAntiLog, Lotje, Javierito92, PPerviz, Opop5757, Duoduoduo, Ztbs1000, Chennaiseo,
DARTH SIDIOUS 2, Munkitty Tunkitty, Mean as custard, Afb525, Danielag2009, NerdyScienceDude, WildBot, , EmausBot, WikitanvirBot, Sohamshukla86, Swerfvalk, RA0808, Said531982, NoisyJinx, DominicConnor, Bhallukchana, Lindasepa, TheSoundAndTheFury,
Ttmmblogger, Zasew, Winner 42, Wikipelli, K6ka, JDDJS, Kinyupoo, Hvghvghvghvg, Claritas, Dudiko1303, Valterre, Wayne Slam,
Tolly4bolly, GeorgeBarnick, Donner60, Expertricky, Morethom, ChuispastonBot, Peter Karlsen, Suneelkumar1, DASHBotAV, Xanchester, ClueBot NG, Lvitt, Kabir p 69, Deepvalley, Sherri J Bryant, Chester Markel, Just4azee, Tideat, Jgoddard75, Yabsura123, Abhilash2abhi, Inteligentwriter, WikiPuppies, North Atlanticist Usonian, Dev1240, Curb Chain, Titodutta, Calabe1992, Sigiheri, Hallows AG,
MusikAnimal, Konullu, GregMazenIBG, George Minshew, Boleeva, Cfseo, Karkovkarkov, Lavitt, Editorforthegood, , Achowat,
SagarLakhani, Giopersico, Eanjoseph, Pratyya Ghosh, Cdd5-NJITWILL, Trace2012, Mediran, Allan Marsh, Vfranks10, Cujo1800, DaltonCastle, Webclient101, Parviz555, Jimcarry1, Lugia2453, Avaldib, SFK2, Jhbwikis, Ekips39, Dave Braunschweig, Epicgenius, Jamesmcmahon0, Infosunil, Tentinator, Hendrick 99, Tkangsayua, Michellemaree, LauraLMenders341, BreenanWilliams0001, GooglePlex789,
Grandtheftauto59, Mediator ram, Jayuk95, Femobasha, JaconaFrere, Cvhkzxcvhzkxcvhkj, Lycosist, Vilool1, Southeasterner, Roccomob,
LTalamantez, Loraof, Apenuta, Thcnetwork, KasparBot, Gamergirl192, ABCDEFAD, Rodgers 15 and Anonymous: 955
Financial services Source: http://en.wikipedia.org/wiki/Financial_services?oldid=665064622 Contributors: Damian Yerrick, The Anome,
Edward, Michael Hardy, Modster, Ronz, Jiang, Kaihsu, Lukobe, Secretlondon, Nurg, Clarkk, Alphaxer0, Psb777, Bobblewik, Gadum,
OverlordQ, Sam Hocevar, Pgreennch, WikiDon, Scottk, D6, Noisy, Discospinster, Rich Farmbrough, Notinasnaid, Kenb215, TerraFrost,
CanisRufus, MBisanz, Sietse Snel, Cmdrjameson, Srl, Jerryseinfeld, Cavrdg, Arcenciel, InShaneee, Lee S. Svoboda, Ombudsman, Saga
City, Ceyockey, Dr Gangrene, Woohookitty, Pixeltoo, Uris, DESiegel, Halcatalyst, BD2412, Ketiltrout, Sjakkalle, Koavf, Feco, JiFish,
RexNL, FireballDWF2, DVdm, Uvaduck, Gwernol, Elfguy, Wavelength, RussBot, Gaius Cornelius, CrazyTalk, Spike Wilbury, Welsh,
Vivenot, Dougak, Arthur Rubin, GraemeL, Carabinieri, Katieh5584, CIreland, Luk, SmackBot, Amolshah, Edgar181, Jwestbrook, PeterSymonds, Sloman, BowChickaNeowNeow, Hmains, ERcheck, Chris the speller, Bluebot, Simon123, A. B., Sct72, Chendy, Hchizik, Can't
sleep, clown will eat me, ButtonwoodTree, Diasimon2003, Jcembree, Kuru, Corza, 16@r, Willy turner, Beetstra, Alast0r, Ginkgo100,
Joseph Solis in Australia, IvanLanin, JustinRossi, Linkspamremover, Deetdeet, Joodferl, Ale jrb, NinjaKid, Ramymora, Christian75,
Andre999, Hydroshock, Epbr123, Barticus88, Www.crossprofit.com, Headbomb, Jernoult, Nick Number, QuiteUnusual, Gregalton,
Zedla, Kauczuk, Davewho2, Hagbard13, Barek, MER-C, Greensburger, RainbowCrane, Johnmccollim, Magioladitis, Hroulf, RBBrittain,
Rich257, Roue2, Calltech, Pvosta, FisherQueen, CliC, Haamster, Rettetast, PCock, Ben5082, Jarrad Lewis, Crocodile Punter, Arms &
Hearts, Melmunch, DMCer, Idioma-bot, VolkovBot, Patriotfootball, Darkedict, TXiKiBoT, Ashwin palaparthi, Jkeene, Jattaway, Broadbot, Naive rm, Jackfork, UnitedStatesian, Zhenqinli, SheeldSteel, Rgnewbury, Darkieboy236, Barkeep, WereSpielChequers, Yintan,
Targeman, Chumki91, ClueBot, ImperfectlyInformed, Lenxlin, Boing! said Zebedee, Fireblae, Alexbot, PixelBot, Leonard^Bloom, Arjayay, Thingg, Orina22, Aitias, Tigeron, Jburchard1, XLinkBot, Susanjane102, Boyd Reimer, WikHead, Vegas949, Jmmbc, Addbot, Wildhaggis, Leszek Jaczuk, Sebastian scha., Tassedethe, Lightbot, Zorrobot, Jarble, Luckas-bot, TaBOT-zerem, Wiki wiki pedia lets go, CSimons, Jean.julius, Noq, Gnomeliberation front, Materialscientist, Antiliby, Citation bot, Cameron Scott, Wsubob, Xqbot, Themightyrambo,
Gabz80, Resident Mario, Sophus Bie, AJCham, Liridon, Lifnlsdlsdnf, Sparti1, Lars Washington, Jirka.h23, Lotje, Dinamik-bot, Gulbenk,
Onel5969, Mean as custard, RjwilmsiBot, Sargdub, WikitanvirBot, TheSoundAndTheFury, Finance C, ZroBot, Daonguyen95, Handheldpenguin, Ocaasi, Elementrider77, Areetkid, ElissaBuie, Sepersann, Btuppack, Est.r, Xanchester, ClueBot NG, Ramillav, Mathew105601,
Melbinse, Suresh Anumolu, Masssly, Widr, Klopotowska karolina, HMSSolent, MusikAnimal, Dan653, 10Barca, Polmandc, Aisteco,
Pratyya Ghosh, Davidson222, Amedd, Pwers, Oakhonor, Moneystreet, Lugia2453, SFK2, Beccare, Mervat Salman, WyeatesODI, EllenCT,
ROOOOY, Visionpayments, Faaastcash, Sazz123456789, Sowndaryab, Monkbot, AKS.9955, Curlymanjaro, Audliew, Vialbacks66, LTalamantez, Wordedits14, Defense Reviewer, Anitamind, Chris.mueller335 and Anonymous: 234
Personal nance Source: http://en.wikipedia.org/wiki/Personal_finance?oldid=656151089 Contributors: SimonP, James Sa, Mydogategodshat, Greenrd, Joy, Profmike, Vt-aoe, Astronautics~enwiki, ZimZalaBim, Altenmann, Hadal, Fuelbottle, Just Another Dan, Piotrus,
ESkog, JoeSmack, El C, Shanes, Spalding, Jerryseinfeld, Rd232, Dqmillar, Andrewpmk, Darrelljon, VladimirKorablin, Jrleighton, Versageek, Zzyzx11, BD2412, NebY, Vary, R.O.C, Feco, Nivix, Lmatt, Kroboth, Tonync, Gwernol, Stephenb, Wimt, Finbarr Saunders, Nirvana2013, Noddycr, Aaron Brenneman, Anetode, Syrthiss, Takeel, Zzuuzz, NeilN, Andman8, Sardanaphalus, SmackBot, Clpo13, Ohnoitsjamie, NickGarvey, Chris the speller, Jahiegel, Kuru, F15 sanitizing eagle, Caeine induced78, TastyPoutine, Clarityend, Matsiltala,
Chuck Marean, Siakhooi, Kozuch, Thijs!bot, Headbomb, Michael A. White, CTZMSC3, Tangerines, Gregalton, Dpodley, Barek, MERC, Bstroh, The Transhumanist, SiobhanHansa, Zha, Hmu111~enwiki, Chivista~enwiki, Marianna1407, CliC, Pfblogger, J.delanoy,
Pharaoh of the Wizards, Athaenara, Ben5082, Kodos R, Jjswanso, Bonadea, Idioma-bot, Funandtrvl, TXiKiBoT, JimmyCor, Darkside05, Personalnance, Yintan, Johnlowe78, YSSYguy, ClueBot, Kl4m, ImperfectlyInformed, Ewawer, Fcfc, Kashi0341, Myattorneyblog,
Sastagour, Miracle33, 1wealthbuilder, Justrick, Excirial, Investored, Millerz1897, Antonwg, 05runner, XLinkBot, Katandrkatandr, Zodon,
Catalina-symbina, Addbot, PhileasLaville, Captain-tucker, Download, Dezmo22, Legobot, Yobot, Spidermedicine, AnomieBOT, Utopianhorizon, ArthurBot, Obersachsebot, Xqbot, Wronguy, Cassandra21st, JustThrive, Ooper01, George Carlin Fan, Mykjoseph, Alonhu,
Yulracso, Elisalucia, Zrosen2, Al Wiseman, FrescoBot, TruHeir, LazyLizaJane, Assetprotectioninformation, Themainleader, Surya3716,
TobeBot, DixonDBot, Thestraycat57, Psyclepump, Mean as custard, J8jwiki, EmausBot, Pintuhs, WikitanvirBot, Thinktwins, Futerica, Parkerkev, Alexandermin, Mvaraujo~enwiki, ClueBot NG, Sherri J Bryant, BigEars42, Pine, MusikAnimal, Mitesh1401, Rodo82,
Viveksharma020, Rubysword365, Troll1184, Vfranks10, Eyesnore, Andres Possee, Mattiethehatter, BreenanWilliams0001, Sowndaryab,
Jayuk95, Robertchrist101, Sarah.sibel, Writers Bond, David123456712, LTalamantez, Kirkchisholm, Praditk, Kim Oun and Anonymous:
149
Corporate nance Source: http://en.wikipedia.org/wiki/Corporate_finance?oldid=661271864 Contributors: Enchanter, Edward, Michael
Hardy, Paul A, Ronz, Cherkash, Mydogategodshat, Greenrd, Maximus Rex, Furrykef, Taxman, Shizhao, Johnleemk, Robbot, Paranoid,
ZimZalaBim, Modulatum, Utcursch, Pgreennch, Fintor, MementoVivere, Canterbury Tail, Discospinster, Mwanner, Shanes, Truthux,
Chrisvls, Giraedata, Jerryseinfeld, John Fader, Wikidea, Pouya, RainbowOfLight, Capecodeph, Reinoutr, Woohookitty, Guy M, Je3000,
Graham87, BD2412, Dpr, Rjwilmsi, ErikHaugen, Feco, Lmatt, Gwernol, Elfguy, YurikBot, RussBot, Gaius Cornelius, ENeville, Grafen,
Dsol, M3taphysical, Yonidebest, Tiger888, NeilN, Andman8, DocendoDiscimus, SmackBot, D-bot, Mauls, Alsandro, Gilliam, Ohnoitsjamie, Anwar saadat, Bluebot, DMS, Silly rabbit, Colonies Chris, Can't sleep, clown will eat me, Mitsuhirato, Smallbones, KaiserbBot,
Buyoof, RJN, Dantadd, Kuru, NongBot~enwiki, Ckatz, Beetstra, SQGibbon, Meandmyself, Arjan1071, Hu12, Levineps, Lucky627627,
No1lakersfan, Gregbard, B, Kozuch, JamesAM, Thijs!bot, Jafcbs, Headbomb, CharlotteWebb, Tapan bagchi, Seaphoto, Spencer, Barek,
MER-C, The Transhumanist, LittleOldMe, Bmarmie, Lewislams~enwiki, Ddr~enwiki, EagleFan, Globalprofessor, Yowkien, Jinglesss,
Jwestland, Rwil02, Flowanda, STBot, R'n'B, Tgeairn, J.delanoy, Svetovid, FactsAndFigures, Dumdude, AntiSpamBot, Steel1943, Kelapstick, Buddylovely, Polyextremophile, TXiKiBoT, SueHay, Walor, UnitedStatesian, Urbanrenewal, Manaskumar, Cat set go, Andy Dingley, Lamro, Mhardwicke, Struway, SieBot, Ding.iitk, Financeeditor, Artoasis, Anchor Link Bot, Mr. Stradivarius, ClueBot, DanielDeibler, Khmarks, Kered1954, Nagika, Jkhcanoe, SchreiberBike, NellieBly, Strategynode, Addbot, Fieldday-sunday, MrOllie, HerculeBot,
100
Yobot, Angel ivanov angelov, AnomieBOT, Nstse, Bookboon, Obersachsebot, Giuseppe Giusti, Srich32977, Haen, GrouchoBot, Invest in knowledge, Nanocho, Sandymok, FrescoBot, Igor101, A8UDI, TobeBot, Trappist the monk, JaquiB, Bongdentoiac, EmausBot,
JteB, Bbkobl, Dewritech, GoingBatty, Finance C, ZroBot, Amjad120, Jessy062811, Tolly4bolly, Jessy062811-NJITWILL, Dkevanko,
AndyTheGrump, Senator2029, Taenzee, Gwen-chan, ClueBot NG, Thbroome, Pearsorh, 123Hedgehog456, Expertz123, Daisy, MerlIwBot, Helpful Pixie Bot, Sigiheri, BG19bot, BendelacBOT, MusikAnimal, AdventurousSquirrel, CFAbrielle23, Financereseracheditor,
Anwesha.srkr, Flat Out, Christopherwilds, Michellemaree, Mschmidt224, RedDog239110, Wikitakegg76789, WisBadgersFan71, LauraLMenders341, Georgesoros911, BreenanWilliams0001, GMATSCORE800, Alun lawrence, Cleanupwikisupport11, HotlineMiami5533,
GooglePlex789, Grandtheftauto99, CrystalAveeno1, Grandtheftauto59, WPGA2345, Csusarah, Monkbot, Jdfsmsu, NicolasChristiaen,
Iimkphb and Anonymous: 208
Financial capital Source: http://en.wikipedia.org/wiki/Financial_capital?oldid=662887174 Contributors: Andre Engels, Christian List,
Enchanter, Roadrunner, SimonP, Edward, Pnm, MartinHarper, Docu, Mydogategodshat, Jusjih, RedWolf, Nilmerg, Stevietheman, Pgreennch, EagleOne, Pjacobi, Saintswithin, Lycurgus, Aaronbrick, Maurreen, HasharBot~enwiki, Uogl, Max rspct, Sylvain Mielot, Kralizec!,
Sj, Gurch, Lmatt, Chobot, Bgwhite, Wavelength, RussBot, Nirvana2013, Alex1011, Timeshifter, Anwar saadat, DHN-bot~enwiki, Cybercobra, Lus Felipe Braga, Giancarlo Rossi, Salamurai, JohnCD, Thomasmeeks, Cydebot, Joowwww, Thijs!bot, Headbomb, Crzycheetah,
Frank, Seaphoto, Gregalton, MER-C, Robina Fox, PhilKnight, Bequw, Olivierchaussavoine, Robertson-Glasgow, Richard D. LeCour,
Zain Ebrahim111, Logan, Ddxc, Sanya3, Fratrep, Finnancier, Mr. Granger, ClueBot, ImperfectlyInformed, Mild Bill Hiccup, Addbot,
Alanscottwalker, Amirobot, AnomieBOT, Piano non troppo, Mbiama Assogo Roger, Materialscientist, Citation bot, Omnipaedista, RibotBOT, Sector001, FrescoBot, Paine Ellsworth, Ncravens, DexDor, NotAnonymous0, ClaretAsh, HMSSolent, Post2akjain, Hallows AG,
Student Harry, Frze, Ujongbakuto, Wikimunter, SFK2, Mooreee11, My name is not dave, YiFeiBot, Homni, Fundaclear, Morran vikas,
KasparBot and Anonymous: 64
Cornering the market Source: http://en.wikipedia.org/wiki/Cornering_the_market?oldid=650830174 Contributors: Ed Poor, Maury
Markowitz, Edward, Infrogmation, Kwertii, Prumpf, Nurg, Gzornenplatz, RayBirks, Elroch, Joyous!, Narsil, Elipongo, Hooperbloob,
Ashley Pomeroy, Axeman89, NorrYtt, Ajb, Jweiss11, Chobot, Farmanesh, Loop202, BOT-Superzerocool, Urger48400, Jereymcmanus,
Groyolo, DocendoDiscimus, SmackBot, Eskimbot, Hmains, Gobonobo, Amniarix, DanielRigal, Cydebot, AngoraFish, JAF1970, Headbomb, Blue Tie, Kbthompson, Dman727, VoABot II, Gwern, Anne97432, Bernard S. Jansen, JohnDoe0007, SueHay, Lamro, Alexbot,
TheFutureIsComing, Drolz09, Addbot, Lightbot, Yobot, Duccio55, Whiskeydog, Citation bot, Dr. Slide, Citation bot 1, Full-date unlinking bot, RoadTrain, Vrenator, Rickrossistheboss, RjwilmsiBot, Alph Bot, IronStranger, EmausBot, Qrsdogg, F, , ClueBot NG,
Greggp42, BG19bot, BendelacBOT, MusikAnimal, Khazar2, Maniac Mechanic, Lunivore, Christopher Whidden and Anonymous: 57
Insurance Source: http://en.wikipedia.org/wiki/Insurance?oldid=664081844 Contributors: AxelBoldt, Lee Daniel Crocker, Bryan Derksen, Grouse, Matusz, Enchanter, SimonP, ChangChienFu, N8chz, Vkem~enwiki, Edward, Patrick, Booyabazooka, Pnm, Mic, Zeaner, Perry
Kundert, Ellywa, Ahoerstemeier, Angela, Kingturtle, Bogdangiusca, Nikai, Andres, Jiang, Dysprosia, Cjmnyc, Maximus Rex, Ryuch, Furrykef, Saltine, Itai, Nv8200pa, Taxman, Tempshill, Shizhao, J2rome, Pakaran, Chuunen Baka, Robbot, Dale Arnett, Altenmann, Yosri,
Hadal, GreatWhiteNortherner, Tobias Bergemann, Alan Liefting, Marc Venot, Albatross2147, Elf, Oberiko, Aratuk, Everyking, Bkonrad,
Hoho~enwiki, Jfdwol, Hansjorn, JimD, Binoy211, SWAdair, Edcolins, Golbez, Gyrofrog, Tristanreid, Stevietheman, Gadum, Woggly,
Andycjp, Geni, Antandrus, Rdsmith4, Ellsworth, Mozzerati, Bk0, Ukexpat, GreenReaper, Adashiel, Intrigue, AAAAA, Jayjg, Monkeyman, Discospinster, Rich Farmbrough, Zoso Jade, Wclark, Smyth, Xezbeth, Mani1, Martpol, ESkog, Kbh3rd, Jnestorius, CanisRufus,
DS1953, Mwanner, Cacophony, Coolcaesar, Femto, Bobo192, Giraedata, Jerryseinfeld, Snacky, MPerel, Hooperbloob, Jakew, Conny,
Musiphil, Alansohn, Gary, Tek022, Halsteadk, Andrewpmk, M7, John Quiggin, Lord Pistachio, Wikidea, Yamla, Katefan0, Ombudsman,
Velella, ClockworkSoul, Saga City, RainbowOfLight, TenOfAllTrades, Shoey, Versageek, SteinbDJ, Alai, HenryLi, TerminalPreppie,
Deror avi, Nuno Tavares, OwenX, Woohookitty, Swamp Ig, Pol098, Commander Keane, Bunthorne, Optichan, Arden, Mandarax, Graham87, BD2412, Dpr, Johnwhunt, Casey Abell, Sj, Koavf, Commander, Bill37212, Mulconrey, ElKevbo, Bubba73, Czalex, Bhadani,
Klonimus, Robert Fraser, SNIyer12, Leithp, Ian Pitchford, StephanCom, Crazycomputers, Ewlyahoocom, Intgr, Ghingo, Alphachimp,
Ahunt, Chills42, Nastajus, DVdm, Simesa, Gwernol, Roboto de Ajvol, YurikBot, Wavelength, RussBot, Muchness, Bhny, Fabricationary,
Stephenb, CambridgeBayWeather, NawlinWiki, Nowa, Mike18xx, Sporadikos, Jaxl, DarthVader, Cleared as led, Nick, Retired username,
Bobdavis4, Mmmbeer, Zains, Threepwood89, Emersoni, Nlu, Avraham, AjaxSmack, Richardcavell, FF2010, Phgao, Zzuuzz, Lt-wiki-bot,
Closedmouth, Rb82, Janto, Madines, GraemeL, Shawnc, Edgerunner, LeonardoRob0t, MrHen, Garion96, Jonathan.s.kt, Meiers Twins,
Stumps, Quadpus, KnightRider~enwiki, SmackBot, KMcD, Reedy, KnowledgeOfSelf, Pgk, C.Fred, Davewild, TimBits, Cooksey87, CapitalSasha, Paulmeisel, SmartGuy Old, Dudester, Yamaguchi , Sloman, Gilliam, Ohnoitsjamie, Hmains, Armeria, Anwar saadat, Amatulic, Chris the speller, Thegn, DJ Craig, SchftyThree, PureRED, Octahedron80, DHN-bot~enwiki, A. B., Darren Wickham, Famspear,
Can't sleep, clown will eat me, Symbiote, Yidisheryid, Peter Ngan, Pevarnj, Electrolite, Edivorce, Wine Guy, HeteroZellous, Krich, Flyguy649, Pupeyvelo, Nakon, Bradmca, StephenMacmanus, John wesley, MisterCharlie, Shadow1, G716, Only, Crd721, DMacks, PhotoJim,
Kukini, Kuru, Khazar, J 1982, Gobonobo, Disavian, ML5, Tony Corsini, MidnightSwinga, Nellis, RomanSpa, Rawmustard, Ckatz, 16@r,
Choppie, Filanca, Shangrilaista, Martinp23, Kaos Klerik, Bronayur, Stephrigu, Dcyer, DomStapleton, MTSbot~enwiki, Galactor213,
Hu12, DabMachine, Levineps, Srinikasturi, Ebrenner8, Iridescent, RLamb, Joseph Solis in Australia, Licardo, Natrajdr, CapitalR, Courcelles, Linkspamremover, Tawkerbot2, Maslakovic, Suwarnaadi, CalebNoble, JForget, Anoops, Ossifer, Tanthalas39, Megaboz, Mtgkooks,
KyraVixen, JohnCD, ArmyOfFluoride, Svendsgaard, Bill.albing, Dgw, Argon233, Outriggr, MarsRover, Myasuda, Manishgh, Jane023,
Gogo Dodo, A Softer Answer, Chasingsol, Synergy, DumbBOT, Optimist on the run, Lee, Omicronpersei8, Augfan77, PKT, Epbr123,
Bezking, Josephbrophy, N5iln, Mojo Hand, Headbomb, Kathovo, I do not exist, Mfhbrown, X201, RFerreira, NigelR, DoomsDay349, Big
Bird, Futurebird, Escarbot, I already forgot, Faperez, AntiVandalBot, Yonatan, Widefox, Gaviidae, CodeWeasel, SummerPhD, R4gn4r,
BigNate37, Lumbercutter, Dharmasattva, Fayenatic london, Sehsuan, Spencer, Zedla, Arsenikk, Husond, Barek, MER-C, Dunwoody01,
Cleanupman, PhilKnight, Mike Teon, Magioladitis, Hroulf, VoABot II, Fwmg, Rich257, Kwansanbook, Theroadislong, Wikicide,
Praddy06, Roue2, Hamiltonstone, Logictheo, BC Graham, Kdc3, J.Marlowe, DerHexer, JaGa, Pax:Vobiscum, Calltech, LymphToad,
Aeklein, Swizzlez, Hdt83, MartinBot, CliC, Liopa, Thirdreading, Reggy73, R'n'B, CommonsDelinker, VirtualDelight, Narykids, Paulmcdonald, Radbug, J.delanoy, Trusilver, Svetovid, Psycho Kirby, Gilbo32, Drewwiki, Lyseong, Davidprior, Gzkn, Being blunt, Dispenser,
Znatok, Whilding87, Dkutcher, Gurchzilla, Tippling.philosopher, AntiSpamBot, NewEnglandYankee, Kshpitsa, Sewings, Ohms law,
SJP, JPatrickBedell, Crystalball~enwiki, Peraphan, KylieTastic, Cometstyles, Butnotthehippo, DH85868993, Melmunch, OneOfABullet,
Dozen, Bonadea, Pdcook, Jonhol, Xiahou, Funandtrvl, Fengshui88, Malik Shabazz, LionMans Account, Mnacht, Jublee18, Philip Trueman,
McTavidge, TXiKiBoT, Juicydave, BuickCenturyDriver, Rcherrick, Martin451, Benjasmine, Jackfork, Sidewinder1, PDFbot, Kingjubbs,
Ben Ward, Seanmtz59, Blurpeace, Kilmer-san, Valkyryn, Stephen J. Brooks, Sue Rangell, Michael Frind, Xboxfreak, Sfmammamia,
Rock2e, DiggyStyle, Mcrossdc, Biscuittin, SieBot, MLBplayer456, Meerafeedback, Springbreak04, Gerakibot, Papillonderecherche, Yintan, Bhagwatkumar, Numbersinstitute, Bentogoa, Sal2010, Jojalozzo, Nopetro, Dlobovsky, EnOreg, Oxymoron83, Judicatus, AngelOfSadness, Corp Vision, Subikar, Arnobarnard, OKBot, FusionNow, Torchwoodwho, Ward20, WikiLaurent, Andystyart, Gantuya eng,
12.1. TEXT
101
Dip2007, Startswithj, Explicit, Super edd, Ricklaman, Lolaraa, Elassint, ClueBot, BibleThumper4 3rdHeaven&Earth, GorillaWarfare,
The Thing That Should Not Be, Kieran Talbot, Rjd0060, ImperfectlyInformed, Saddhiyama, Wutsje, AlasdairGreen27, Eiland, Uberimaedei, Boing! said Zebedee, Dissento, Abrandvold, Arunsingh16, Shustov, MindstormsKid, Somno, -Midorihana-, Kjramesh, SpikeToronto, Jamieeeeeeeeeeee, Caesar1951, Boomsma, Rhododendrites, Sun Creator, Derbyadhag, Morel, PatrickReno, Dekisugi, The Red,
Nukeless, Thingg, Whatsthatbluething, Aitias, Versus22, Samlivingstone, Louisrix, Life of Riley, Anual, Helixweb, BarretB, XLinkBot,
Dpdrummer14, Stickee, EastTN, Symonweedon, Little Mountain 5, Cedced1, Ahadisnain, Danielroberts, Addbot, Twaz, Freakmighty,
Sdterry, Vasiura, Otisjimmy1, Ronhjones, Nomad2u001, Mr. Wheely Guy, CanadianLinuxUser, Leszek Jaczuk, NjardarBot, MrOllie, Download, Morning277, Cambalachero, Tukanglotek, Izaacsmall, Goequinox, Sfaridi, Tide rolls, OlEnglish, Apteva, Teles, Msm18,
Hukdupcivic, Artichoke-Boy, Luckas-bot, Yobot, Ptbotgourou, Fraggle81, Tjah ajoeku~enwiki, Specious, II MusLiM HyBRiD II, Gima72,
KamikazeBot, AnakngAraw, Tsagilistic, Aoso0ck, Kevindy, Longevityquotes, AnomieBOT, Drivewest, DemocraticLuntz, Rescuechick,
Jim1138, Galoubet, Kingpin13, Materialscientist, Citation bot, LilHelpa, Xqbot, Sionus, Addihockey10, Capricorn42, Jerey Mall, Insure110, Stars4change, Tad Lincoln, Grim23, Sc3499a, Hkthomson, Erdemkoc, Tyrol5, Control.valve, Srich32977, Out of Here, Omnipaedista, Anhydrobiosis, Mathonius, Basharh, Chinsurance, Moxy, IcedNut, Reym123, Firstcards, KiddoKiddo, A.amitkumar, James
R. Ward, Worldwide historian, Yaromunna, FrescoBot, Dannyaa, EthanLeduc, LucienBOT, Tobby72, Eminently insurable, Haeinous,
Shienhendry, Pxos, Dxroaddogg32, Citation bot 1, EagleEye96, Amplitude101, Dano1970, CRoetzer, Khushal.rakesh, Allstateowego,
Pinethicket, I dream of horses, Fuzbaby, Trijnstel, Yourkey, Calmer Waters, Jschnur, Roxymurphy, Alexjones9281, James Daily, Littledogboy, Petersud, Jackrober, Tweed-Lover, MutantPlatypus, TobeBot, Stuartclark1, Kurenchudge, Alexmilt, Seattleraincity, Vrenator,
Shashuec, Weaselword, Tbhotch, Anuradhaarandara, SlavaRybalka, Skid21, Mean as custard, Phlegat, Wintonian, Husnain22, EmausBot, John of Reading, Sophie, Therearewaytoomanybooksinhere, BillyPreset, Dewritech, GoingBatty, Nishanttak22, Preetsibia, Jirka62,
NotAnonymous0, TheSoundAndTheFury, Solarra, Tommy2010, Wikipelli, Josve05a, rico Jnior Wouters, Jonpatterns, Jk312728666,
Dogstring, Nudecline, Probablytrue, Vanessa8, L Kensington, Damienvon, Granite333, Noodleki, Bluegreen1011, Larakath, Coastalcatwatch, Legal123, Mdjwood, TruthisBeauty2010, Wakebrdkid, Neil P. Quinn, P3landers, GrayFullbuster, DASHBotAV, Ld long133,
Trulex 89, 28bot, TBM10, Signalizing, ClueBot NG, Jango2609, Since 10.28.2010, Gareth Grith-Jones, , This
lousy T-shirt, ForgottenHistory, Rio 001, Normad33, O.Koslowski, Insurance120, Widr, Frodo9me, Newyorkadam, Chillllls, ETips, Coolrash.id1, Dotz2, Raymenddavis, Helpful Pixie Bot, Harpi711, Jessie987654321, Qbs2011, Krenair, Zigload, Jameskshaer, Joesmo1234,
Wickerman45, Cmoras, AmberBates, Wiki13, MusikAnimal, Shivani666, Cabell Vildibill, Sembahyank, Compfreak7, Professional Insurance Agents, MaryChristiano, AdventurousSquirrel, Suwandichen13, Co2Und3rground, Atonway, Jfhutson, Ahsansaeed2012, Robpierre,
Klilidiplomus, Achowat, Lieutenant of Melkor, Anbu121, Yogeshaniya, Bored On The Holidays, BattyBot, Principesa01, PaddyWhacker,
Mdann52, Jaredfranc, Neromancer, CFAbrielle23, Tryinsurancequotes, Jionpedia, Anthonyliston, Dialabank001, Ramesh.kishor100, Mogism, RKsun, Bschuyler, TheIrishWarden, TwoTwoHello, SFK2, Leeloohappy, Jitin Girdhar, ServantofAllah93, Sabroo, Saadahcar, Watsonagencynet, IanWaldron22, RandallD, Peterpaul01, Jainnaman91225, Tentinator, Consumersrevolt, Gillamg, Thebootywarrior1999,
No1inparticularhere, MCA(Motor Club of America), Muhammadbabarzaman, Glaisher, Hansmuller, Ginsuloft, Snydemic, Colin1965,
Aadrk, Jonti.Brozin, JaconaFrere, Susanonline87, Ajay 019, Legalitastoksin, Monkbot, TheGreatInsurance, Srwikieditor, Rlee8414, Aysel
Ibayeva, Mark204Teen, Lor, Bmedia, Johnmillerusa, Haedtan, Caliburn, Queenbwest, Jdfsmsu, Crystallizedcarbon, Jassica Bella, Sahan1989, Janicelporto12, KasparBot, Gamergirl192, Johngot, UCONNLLM, Nizart333, ResearchMinder, Juni ikiki, AndersonCooper11
and Anonymous: 1091
Derivative (nance) Source: http://en.wikipedia.org/wiki/Derivative_(finance)?oldid=664670297 Contributors: Chenyu, Mav, Bryan
Derksen, Roadrunner, SimonP, Edward, Kchishol1970, Michael Hardy, Willsmith, Kwertii, Kku, Mic, Pcb21, JASpencer, Mydogategodshat, JidGom, Renamed user 4, Jfeckstein, Wik, Tpbradbury, Taxman, Topbanana, Carax, Jni, Robbot, RedWolf, ZimZalaBim,
Gandalf61, Babbage, Sekicho, Hadal, Cyrius, Mattaschen, GreatWhiteNortherner, Alan Liefting, Fastssion, Marcika, Niteowlneils,
Bobblewik, Utcursch, Piotrus, RayBirks, Urhixidur, MementoVivere, M1ss1ontomars2k4, Mike Rosoft, Chris Howard, Sebrenner, Rich
Farmbrough, Wk muriithi, Notinasnaid, Bender235, Fenice, Aecis, Aude, RoyBoy, Grick, C S, Jerryseinfeld, Nk, Rajah, John Fader,
Swapspace, Landroni, Jumbuck, Gary, Mo0, C960657, Mu5ti, Jrleighton, Lerdsuwa, SteinbDJ, DanielVonEhren, Bobrayner, Jberkes,
Woohookitty, Justinlebar, Robwingeld, Qaddosh, Dirnstorfer, Wikiklrsc, GregorB, Eyreland, Lfchuang, Ronnotel, FreplySpang, RxS,
Sybren~enwiki, Rjwilmsi, Helvetius, Feco, Brighterorange, Nguyen Thanh Quang, Tuaw, Ground Zero, Strangnet, Bondwonk, Chobot,
DaGizza, Bgwhite, Rotsor, Kummi, YurikBot, Hairy Dude, RussBot, Htournyol, Salsb, Anomalocaris, Canadaduane, NawlinWiki, Nowa,
Nirvana2013, Johann Wolfgang, Welsh, Jakash, Coolninad, Voidxor, Crasshopper, Historymike, Mastermund, Dan131m, GraemeL, VodkaJazz, Tiger888, DocendoDiscimus, Sardanaphalus, Veinor, SmackBot, InverseHypercube, Vald, Phaldo, Eskimbot, IstvanWolf, SmartGuy Old, Yamaguchi , Ohnoitsjamie, Amatulic, Hippodrome, Chris the speller, JMSwtlk, Caissas DeathAngel, CSWarren, Nbarth,
Ryan O'Rourke, Zven, Can't sleep, clown will eat me, Mitsuhirato, Smallbones, Berland, KaiserbBot, Stevenmitchell, Jmnbatista, Wonderstruck, Salt Yeung, Drphilharmonic, Sgcook, Esb, Jna runn, Usenetpostsdotcom, Rajusom, Ultrasolvent, Kuru, CorvetteZ51, Ulner,
Aleator, Voceditenore, A. Parrot, Beetstra, Calibas, Treznor, Mr Stephen, TastyPoutine, Hu12, Quaeler, Levineps, Typelighter, IvanLanin,
Philip ea, Mmaher~enwiki, A. Pichler, Trade2tradewell, Rosasco, CmdrObot, Ale jrb, Bigfatloser, Equendil, AndrewHowse, Cydebot, Future Perfect at Sunrise, Road Wizard, Trasel, Odie5533, Whiskey Pete, Modemrat, Satori Son, BetacommandBot, Thijs!bot, Kubanczyk,
Headbomb, Glennchan, Notmyrealname, Stybn, AntiVandalBot, WinBot, Seaphoto, 49oxen, Just Chilling, TonyWikrent, Gregalton, Gansos, Ronny8, JAnDbot, Narssarssuaq, MER-C, Epeeeche, Ph.eyes, Jedimook, Hut 8.5, TAnthony, S0uj1r0, VoABot II, MartinDK, Lotusv82, Soulbot, Rich257, Iitkgp.prashant, Fred114, A3nm, Drdariush, Nameweb, WLU, Applrpn, To Serve Man, Donnabuck, CliC,
Sarma.bhs, Phillipb81, Murphman67, Mausy5043, Tgeairn, J.delanoy, BigrTex, PCock, Huey45, Aleksandr Grigoryev, 72Dino, Hossain Akhtar Chowdhury, Eloz002, KnowledgeEngine, Oceanynn, JayJasper, SJP, Olegwiki, Cometstyles, Elbeem, DMCer, Erdosfan,
StoptheDatabaseState, Idioma-bot, Funandtrvl, 386-DX, Philip Trueman, Fishiswa, GLeachim, Altruism, Ask123, Netsumdisc, Goatonastik, JhsBot, Don4of4, Shua2000, UnitedStatesian, Keving 65, TheSix, BotKung, Lamro, Townlake, Falcon8765, EmxBot, NipponBanzai! po-mo irony, QUEWWW, Tresiden, Swliv, Plinkit, Caltas, Ernie shoemaker, Happysailor, Jvs, Oxymoron83, Artoasis, Thobitz,
Steven Zhang, Segregold, Dami99, Anchor Link Bot, Klp02gtm, SEOCAG, Wyattmj, Finnancier, Rinconsoleao, Denisarona, Evitavired,
OTCSF, Derivativeslawyer, Manikongo, ClueBot, Bob1960evens, Chokoboii, Analoguni, Guru cool, StephenRH, Gregpalmerx, Bhuna71,
Texmex81, Ohioer, Orrorin, SpikeToronto, Newyorxico, Floul1, Alastair Carnegie, XLinkBot, Gianetta69, Jprw, Alex 686, Xp54321,
Proofreader77, Istvnka, Misterx2000, MrOllie, Download, Buddha24, Wikomidia, Ehrenkater, Bonewith, Tide rolls, Lightbot, OlEnglish,
Kiril Simeonovski, Gugustiuci, Jarble, Legobot, Luckas-bot, Yobot, Ptbotgourou, Rsquire3, Palindrome101, KamikazeBot, AnomieBOT,
DerivMan, Jarettlee, Jim1138, Piano non troppo, Keithbob, Materialscientist, Citation bot, Zaq100, GnawnBot, LilHelpa, MauritsBot,
Xqbot, 5464536, Btangren, Purplehaziness, Loveless, Sionk, RibotBOT, Reston10, Cktt13, Question: Are you being served?, Mnmngb,
Rangedra, Sandolsky, FrescoBot, Jgard5000, LucienBOT, , EBespoke, Aeolus3, Inazz, Haeinous, Slessard 79, HamburgerRadio, Joe4bikes, Jivee Blau, Consummate virtuoso, Rushbugled13, Ploufman, RedBot, Rachael0008, Mishall1281, Wortoleski, Portsaid, SW3 5DL, TobeBot, Trappist the monk, TylerFinny, Lotje, ShaolinGirl, Franois Bry, RoadTrain, EMP, Rajeshc85, Sdrozdowski,
Makrem.boumlouka, Dscheidt1, RjwilmsiBot, Sargdub, GodfatherOfFX, EmausBot, RAJESHVK, John of Reading, Orphan Wiki, Wik-
102
itanvirBot, Shadiakiki1986, Noloader, Dewritech, Gurumoorthy Poochandhai, Themindsurgeon, Swerfvalk, Ginette.lacroix, Wikipelli,
K6ka, Meg Bill, 2hot2handl, FBIMON, Deanlwiley, ChowSheRuns, Medeis, Conlinp, Tristandayne, Orange Suede Sofa, JanetteDoe, Neil
P. Quinn, 28bot, Socialservice, ClueBot NG, Mechanical digger, Markmuet, ClaretAsh, Spsafw, Cntras, Biosketch, Statoman71, Widr,
Corpcommsgoods, Titieaxis, Chgoe, Helpful Pixie Bot, Codingoutloud, DudeOnTheStreet, BG19bot, Lefa1992, Firetinder, Carnold5935,
Devikakannan, Bana2231, ChidemK, CitationCleanerBot, Wodrow, BattyBot, Topdogtrader, ChrisGualtieri, Dr Stephen Falken, SurenSuraj, Shauljaim, SFK2, Subhankm, Kkumaresan26, Rickkjellberg, GoodWritingFast, Bhuyakasha, Glins1, Theduinoelegy, Scheung098,
Melcous, Monkbot, Diegodaquilio, Sandesh92, Forexnews, SoSivr and Anonymous: 657
Public nance Source: http://en.wikipedia.org/wiki/Public_finance?oldid=663209482 Contributors: Edward, Michael Hardy, PhatJew,
Mydogategodshat, Selket, Shizhao, Robbot, Fredrik, Henrygb, Fuelbottle, Cyrius, ShaunMacPherson, Michael Devore, Khalid hassani,
Andycjp, Cynical, Neutrality, Notinasnaid, Andrejj, Mr. Billion, Jerryseinfeld, Wikidea, Krasnoya, Versageek, Woohookitty, Camw,
TrentonLipscomb, Feco, FlaBot, Latka, John Z, Gangstories, Bgwhite, YurikBot, RussBot, Morphh, Grafen, Arthur Rubin, Andman8,
DocendoDiscimus, Sardanaphalus, SmackBot, The Gnome, Anwar saadat, TimBentley, Neo-Jay, Baronnet, Can't sleep, clown will eat
me, Ajdz, Battlecry, Rrburke, Fosforo18, EPM, Johnkeats, Petr Kopa, Kuru, Hu12, Eastlaw, Blue-Haired Lawyer, Thomasmeeks, Shandris, Hebrides, Kozuch, Thijs!bot, Barticus88, Headbomb, Peace01234, JAnDbot, The Transhumanist, Andonic, Yahel Guhan, Aaustin,
Magioladitis, Hmu111~enwiki, 28421u2232nfenfcenc, R'n'B, J.delanoy, AntiSpamBot, Idioma-bot, VolkovBot, Sovereignpeoples, Caltas, Lucca.Ghidoni, Chanler, Afdoug, Rinconsoleao, Koczy, Passargea, Auntof6, Lunchscale, Summit84, Doopdoop, Ost316, Addbot,
Sabine McNeill, Fluernutter, LaaknorBot, Tide rolls, Yobot, ThinkingTwice, Angel ivanov angelov, Nallimbot, AnomieBOT, Materialscientist, Citation bot, Eskandarany, GB fan, ArthurBot, Cameron Scott, Xqbot, Nasnema, Srich32977, 1958publius, Omnipaedista,
Joaquin008, FrescoBot, PeterEastern,
, Herbs505, Michael.goldshmidt, , Sic6sic, Duoduoduo, Marija Toshevska,
Stryofroam, Solarra, PrinceVikings, Cag244, Xerographica, Pochsad, ClamDip, Pierpietro, Sven Manguard, Taenzee, ClueBot NG,
Gareth Grith-Jones, Korrawit, Cntras, Widr, Runner08, MerlIwBot, BG19bot, Nifemmy, tats canadiens, Justincheng12345-bot, Anthrophilos, Ashkan.sedar, SFK2, The Wikimon, , WeakTrain, Ejw wiki editor, Coolabahapple, Osasere2012, KasparBot and Anonymous:
107
Financial economics Source: http://en.wikipedia.org/wiki/Financial_economics?oldid=664452219 Contributors: Wesley, Bryan Derksen,
Enchanter, SimonP, Edward, Michael Hardy, Pnm, Mic, Dori, Mydogategodshat, Tpbradbury, Taxman, Johnleemk, Postdlf, Hadal, Fuelbottle, Christofurio, Pgreennch, Fintor, David 5000, Canterbury Tail, Bender235, Fenice, Shanes, Cretog8, Jerryseinfeld, Alansohn,
Gary, V2Blast, John Quiggin, Bluemoose, SDC, Rjwilmsi, Exeunt, YurikBot, Morphh, Grafen, Koringles, GraemeL, Tiger888, DocendoDiscimus, Sardanaphalus, SmackBot, Bluebot, Kuru, JDMBAHopeful, JHP, JForget, Thomasmeeks, AndrewHowse, Gogo Dodo, Smee,
Headbomb, Acroterion, Magioladitis, Zbodie, Calltech, STBot, Nihilozero, Bigboss88, Funandtrvl, VolkovBot, Tesfatsion, Lamro, StaticGull, Martarius, Lbertolotti, Aleksd, Tank bund, Torrentweb, NJGW, Addbot, TutterMouse, Protonk, LaaknorBot, Forich, Luckas-bot,
Yobot, Examtester, Portutusd, Nobellaureatesphotographer, Ej463, Ia1998, Olimpiu stefan, FrescoBot, Rbaliq, MastiBot, Trappist the
monk, Ckways, Saurael, EmausBot, WikitanvirBot, ZroBot, ClueBot NG, BG19bot, Ejspeiro, Hebert Per, ChrisGualtieri, Mcc1987,
SPECIFICO, Sol1, Monkbot, Loraof, Rubbish computer, WP khodaie and Anonymous: 101
Mathematical nance Source: http://en.wikipedia.org/wiki/Mathematical_finance?oldid=664619032 Contributors: Mav, Edward,
Michael Hardy, Willsmith, Pnm, Gabbe, Mic, Paul A, Minesweeper, Pcb21, Looxix~enwiki, Ahoerstemeier, Evercat, Mydogategodshat, Charles Matthews, Timwi, Dysprosia, Taxman, Rasmus Faber, Fuelbottle, Giftlite, Christo pale, Fastssion, Christofurio, Jackol,
Zfr, Fintor, PhotoBox, Nparikh, Rhobite, YUL89YYZ, Elwikipedista~enwiki, Msh210, Gary, JYolkowski, Eric Kvaalen, Hgsippe
Cormier, Gene Nygaard, HGB, Oleg Alexandrov, Woohookitty, JBellis, Ruud Koot, Btyner, Ronnotel, HappyCamper, Feco, Smesh,
Margosbot~enwiki, Tezh, Jrtayloriv, YurikBot, Amckern, Smaines, Avraham, FF2010, Cursive, Arthur Rubin, DocendoDiscimus, Sardanaphalus, Ralphpukei, Uxejn, Ppntori, Bluebot, Silly rabbit, DHN-bot~enwiki, JonHarder, Giganut, Jmnbatista, Niuer~enwiki, Kuru,
NongBot~enwiki, Beetstra, Optakeover, Hu12, Colonel Warden, CapitalR, Albertod4, Kolmogorov Complexity, SkyWalker, Punanimal, Myasuda, Stanislav87, Headbomb, Cfries~enwiki, Onyxxman, DuncanHill, Barek, MER-C, Yunli, Acroterion, Hroulf, Michaltomek, Flowanda, Ayonbd2000, Quantnet, Vabramov, Halliron, JonMcLoone, Vasquezomlin, DMCer, Jonhol, Burlywood, Black Kite,
MM21~enwiki, VolkovBot, JohnBlackburne, Tesscass, Jimmaths, Author007, TXiKiBoT, A.j.g.cairns, WebScientist, Lamro, Langostas,
Burakg, Timorrill, Riskbooks, Monty845, Kaypoh, Maelgwnbot, Xiaobajie, Tigergb, Jamesfranklingresham, Lbertolotti, Sentriclecub,
Ahd2007, Mikaey, Kimys, Qwfp, Baoura, Addbot, Eweinber, SymmyS, MrOllie, SpBot, Tassedethe, Matj Grabovsk, Luckas-bot, Yobot,
Allemandtando, AnomieBOT, Drootopula, Ciphers, Portutusd, Quantchina, Materialscientist, ArthurBot, Xqbot, Kaslanidi, Celuici, FrescoBot, SUPER-QUANT-HERO, Angelachou, Billolik, Hannibal19, Sargdub, EmausBot, WikitanvirBot, Nikossskantzos, DominicConnor,
ZroBot, Zfeinst, Financestudent, ChuispastonBot, Helpful Pixie Bot, BG19bot, Northamerica1000, Rodo82, Brad7777, Wolfgang42,
Hebert Per, Limit-theorem, GRUcrule, Sol1, P1971, Yincarl, Loraof, KasparBot, Hillbilly Dragon Farmer and Anonymous: 150
Experimental nance Source: http://en.wikipedia.org/wiki/Experimental_finance?oldid=593081260 Contributors: Marcika, SmackBot,
WilyD, Jesse projet, Ofol, CmdrObot, Moreschi, Bluestreek, Headbomb, MastCell, Funandtrvl, Gavin.collins, Moonriddengirl, WikHead,
Addbot, Yobot, Financestudent, BG19bot, Rongrong.shu, JornBreda and Anonymous: 4
Behavioral economics Source: http://en.wikipedia.org/wiki/Behavioral_economics?oldid=659867317 Contributors: Edward, Michael
Hardy, EntmootsOfTrolls, BAxelrod, Mydogategodshat, Pushmedia1, Jfeckstein, Topbanana, Johnleemk, Jamesday, Paranoid, Taak,
Wmahan, Gadum, Pamri, Piotrus, APH, Sam Hocevar, Pgreennch, Fintor, Grayscale, Solitude, Guanabot, Bender235, Ground, El C,
Ascorbic, Causa sui, Cretog8, Johnkarp, Tobacman, Maurreen, Psychobabble, Jerryseinfeld, Palmcluster, Slightlyslack, Gary, John Quiggin,
Wikidea, Mysdaao, Woohookitty, Madchester, Nakos2208~enwiki, EcoMan, Qwertyus, Imersion, Rjwilmsi, Quiddity, The wub, VKokielov, Kpe, Bgwhite, Gwernol, Vmenkov, YurikBot, Sjors, DanMS, Gaius Cornelius, Shaddack, Morphh, Madcoverboy, Nirvana2013,
Rieger, Welsh, Rjlabs, Tony1, Lucasreddinger, Lockesdonkey, Zzuuzz, Otto ter Haar, SmackBot, Southwestpaw, Thrasibule, DCDuring, Brick Thrower, Eskimbot, SmartGuy Old, ToddDeLuca, Richmeister, Ohnoitsjamie, Jprg1966, MartinPoulter, Crander, Radagast83,
Vina-iwbot~enwiki, Workman, Byelf2007, Chilismaug, JzG, KLLvr283, Microchip08, Butko, Wttsmyf2, J Spratt, Randomtime, Beetstra,
JDMBAHopeful, Michael.schierdecker, Kanon6996, Hu12, JHP, HalfDome, Ofol, Trialsanderrors, Trade2tradewell, Jackzhp, Van helsing, Thomasmeeks, Penbat, Cydebot, FastLizard4, Antura, Thijs!bot, Headbomb, Streque, Marek69, Deipnosophista, JiveAlive5, C4duser,
Lfstevens, Mdz, Davewho2, JenLouise, MER-C, Epeeeche, Geniac, Magioladitis, Meredyth, MastCell, Rgfolsom, Coughinink, Calltech,
Francob, STBot, Gowish, EdBever, Ignatzmice, DarwinPeacock, Pwarnock, DavidCBryant, Jarry1250, Gainslie, Squids and Chips, Idiomabot, Funandtrvl, Paulscho, Asubrahm, Kk777, Netsumdisc, Tesfatsion, Lamro, Amritasenray, Quantpole, Sposer, SieBot, Kellypeters,
Lomoruth, Flyer22, Jojalozzo, Artoasis, Manway, Mylorin, StaticGull, Szalagloria, Anchor Link Bot, 88.shyam, Rinconsoleao, Clefticjayjay, Sajishgp, Jaccos, ClueBot, Koczy, Kai-Hendrik, Nbearden, MLCommons, Sky20nyc, Faizul Latif Chowdhury, Niceguyedc, Jersey
emt, Oparadoha, Palma 01, Excirial, Markory, Ahd2007, SchreiberBike, Aleksd, Torrentweb, Thaimail, DumZiBoT, Dylanfromthenorth,
XLinkBot, Stickee, SeamusSweeney, Addbot, Dedekinder, DOI bot, Dukealum, Skywalker415, Jncraton, Download, EconoPhysicist,
12.2. IMAGES
103
Iakov, Tassedethe, Parisab, Tide rolls, Electrosaurus, Yobot, Rajeevthakkar, Examtester, AnomieBOT, NickK, Citation bot, Tekks, Quebec99, LilHelpa, Xqbot, Loveless, Tomwsulcer, Mlpearc, Srich32977, Supernova new, Solphusion~enwiki, Countrydoc1, WissensDrster,
Szstanley, Kickyandfun, Some standardized rigour, SUPER-QUANT-HERO, Outback the koala, Citation bot 1, Nisroc~enwiki, Midiom, AMH-DS, Vstoykov, Xcvb2010, Vingai09, Opop5757, Ztbs1000, EvanHarper, RjwilmsiBot, DASHBot, WikitanvirBot, GaryLKaplan, TedwardHall, Alfredo ougaowen, AvicBot, ZroBot, Richard Snoots, Dreispt, Erianna, Donner60, Usb10, Phronetic, Joannamasel,
ChanM79, Baccy1, Peter Karlsen, RogerTango, Tripezo, ClueBot NG, NieuwZeelanders, Helpful Pixie Bot, PSP30003000, Joolsa123,
BG19bot, ElphiBot, Dzforman, Reza luke, Brad7777, Bakennedy2, MathewTownsend, FinancePublisher, Rhyme1989, Acadmica Orientlis, ChrisGualtieri, NatalieAvigailL, Louey37, Anthro-apology, Khazar2, MEconDelta, EuroCarGT, RichardKPSun, The Vintage
Feminist, Marketpsy, Mrm7171, JoeJerey, Er7xuf, Bronx Discount Liquor, Cdnederhood, Lizia7, WPGA2345, Wolololol, Mickeyhsue, Smokeyjuly, Monkbot, Busedsouls, Thegnomeisy, Smartjohny, Gragre123, Alisco2827, Ihaveacatonmydesk, Jlewis144, Cworden95,
Sarapultsev, Grioman444 and Anonymous: 278
Intangible asset nance Source: http://en.wikipedia.org/wiki/Intangible_asset_finance?oldid=651371502 Contributors: Bender235,
Woohookitty, RHaworth, Je3000, BD2412, Rjwilmsi, RussBot, Gaius Cornelius, SmackBot, Chris the speller, Fuhghettaboutit, AndrewHowse, Qwyrxian, Headbomb, Mr pand, Funandtrvl, Pwnage8, GioCM, Quercus basaseachicensis, SchreiberBike, IA Finance Type,
Yobot, Amoorman86, John of Reading, Rdbhaigh, Breeanelyse, Khazar2, Sethburr and Anonymous: 6
12.2 Images
File:2005life_premia.PNG Source: http://upload.wikimedia.org/wikipedia/commons/3/36/2005life_premia.PNG License: Public domain Contributors: http://en.wikipedia.org/wiki/File:2005life_premia.PNG Original artist: en:User:Anwar saadat
File:2005nonlife_premia.PNG Source: http://upload.wikimedia.org/wikipedia/commons/b/b9/2005nonlife_premia.PNG License: Public domain Contributors: http://en.wikipedia.org/wiki/File:2005nonlife_premia.PNG Original artist: en:User:Anwar saadat
File:2005private_sector_credit.PNG Source: http://upload.wikimedia.org/wikipedia/commons/7/76/2005private_sector_credit.PNG
License: CC BY-SA 3.0 Contributors: Transferred from en.wikipedia; transferred to Commons by User:Stefan4 using CommonsHelper.
Original artist: Original uploader was Anwar saadat at en.wikipedia
File:2006GoodwoodBreedersCup.jpg Source: http://upload.wikimedia.org/wikipedia/commons/e/e9/2006GoodwoodBreedersCup.jpg
License: CC BY 2.5 Contributors: Transferred from en.wikipedia; transferred to Commons by User:Mike2bb using CommonsHelper.
Original artist: Original uploader was TheBluZebra at en.wikipedia
File:2006budget_income.PNG Source: http://upload.wikimedia.org/wikipedia/commons/e/ef/2006budget_income.PNG License: CC
BY-SA 3.0 Contributors: Transferred from en.wikipedia; transferred to Commons by User:Stefan4 using CommonsHelper. Original artist:
Original uploader was Anwar saadat at en.wikipedia
File:2006net_capital_export.PNG Source: http://upload.wikimedia.org/wikipedia/commons/8/8e/2006net_capital_export.PNG License: CC BY-SA 3.0 Contributors: Transferred from en.wikipedia; transferred to Commons by User:Stefan4 using CommonsHelper.
Original artist: Original uploader was Anwar saadat at en.wikipedia
File:2006net_capital_import.PNG Source: http://upload.wikimedia.org/wikipedia/commons/d/da/2006net_capital_import.PNG License: CC BY-SA 3.0 Contributors: Transferred from en.wikipedia; transferred to Commons by User:Stefan4 using CommonsHelper.
Original artist: Original uploader was Anwar saadat at en.wikipedia
File:Accidents_will_happen_William-H.-Watson-Universal-Star-Featurette-1922-EYE_FLM1205-OB_687097-720x404.
ogv.webm
Source:
http://upload.wikimedia.org/wikipedia/commons/1/1c/Accidents_will_happen_William-H.
-Watson-Universal-Star-Featurette-1922-EYE_FLM1205-OB_687097-720x404.ogv.webm License:
Public domain Contributors:
EYE Film Institute Netherlands <a href='//commons.wikimedia.org/wiki/Institution:EYE_Film_Instituut_
Nederland' title='Link back to Institution infobox template'><img alt='Link back to Institution infobox template'
src='//upload.wikimedia.org/wikipedia/commons/thumb/7/73/Blue_pencil.svg/15px-Blue_pencil.svg.png'
width='15'
height='15'
srcset='//upload.wikimedia.org/wikipedia/commons/thumb/7/73/Blue_pencil.svg/23px-Blue_pencil.svg.png
1.5x,
//upload.
wikimedia.org/wikipedia/commons/thumb/7/73/Blue_pencil.svg/30px-Blue_pencil.svg.png
2x'
data-le-width='600'
data-leheight='600' /></a> <a href='//www.wikidata.org/wiki/Q1538389' title='wikidata:Q1538389'><img alt='wikidata:Q1538389'
src='//upload.wikimedia.org/wikipedia/commons/thumb/f/ff/Wikidata-logo.svg/20px-Wikidata-logo.svg.png'
width='20'
height='11'
srcset='//upload.wikimedia.org/wikipedia/commons/thumb/f/ff/Wikidata-logo.svg/30px-Wikidata-logo.svg.png
1.5x,
//upload.wikimedia.org/wikipedia/commons/thumb/f/ff/Wikidata-logo.svg/40px-Wikidata-logo.svg.png 2x' data-le-width='1050'
data-le-height='590' /></a> Original artist: Watson, William H. (director) / Universal Star Featurette (producer)
File:Ambox_globe_content.svg Source: http://upload.wikimedia.org/wikipedia/commons/b/bd/Ambox_globe_content.svg License:
Public domain Contributors: Own work, using File:Information icon3.svg and File:Earth clip art.svg Original artist: penubag
File:Ambox_important.svg Source: http://upload.wikimedia.org/wikipedia/commons/b/b4/Ambox_important.svg License: Public domain Contributors: Own work, based o of Image:Ambox scales.svg Original artist: Dsmurat (talk contribs)
File:Amicable_Society_for_a_Perpetual_Assurance_Office,_Serjeants{}_Inn,_Fleet_Street,_London,_1801.jpg
Source:
http://upload.wikimedia.org/wikipedia/commons/0/0a/Amicable_Society_for_a_Perpetual_Assurance_Office%2C_Serjeants%27_
Inn%2C_Fleet_Street%2C_London%2C_1801.jpg License: Public domain Contributors: The European Magazine and London Review
frontispiece of volume 1801 Original artist: unknown artist from magazine
File:Arbre_Binomial_Options_Reelles.png Source: http://upload.wikimedia.org/wikipedia/commons/2/2e/Arbre_Binomial_Options_
Reelles.png License: CC BY-SA 3.0 Contributors: Own work Original artist: Virginie Joly-Stroebel
File:Assorted_United_States_coins.jpg Source: http://upload.wikimedia.org/wikipedia/commons/5/5e/Assorted_United_States_coins.
jpg License: Public domain Contributors: Own work Original artist: Elembis
File:CDS_volume_outstanding.png Source: http://upload.wikimedia.org/wikipedia/commons/9/93/CDS_volume_outstanding.png License: CC BY-SA 3.0 Contributors: Own work Original artist: MartinD
File:Car_crash_1.jpg Source: http://upload.wikimedia.org/wikipedia/commons/e/e1/Car_crash_1.jpg License: Public domain Contributors: Own work Original artist: Thue
104
12.2. IMAGES
105
106