International Finance 国际金融

Notes to the answers:

1、All the terms can be found in the text.

2、The discussions can be attained by reading the original text.

Chapter 1

Answers:

word/media/image1.gif. T T F F F T T

word/media/image2.gif. 1. reserve currency 2. appreciate 3. was pegged to 4. deficit 5. fixed exchange rates 6. floating exchange rates 7. depreciate 8. market forces

word/media/image3.gif. 1. Confidence in the ability of the U.S. to redeem dollars for gold began to fall as potential claims against the dollar increased and U.S. gold reserves fell.

2. Under the fixed exchange rate system, the value of the dollar was tied to gold through its convertibility in to gold at the U.S. Treasury, and other nations’ currencies were tied to the dollar by the maintenance of a fixed rate of exchange.

3. IMF has adjusted its role in the exchange rate system in view of the development of the situation.

4. After the collapse of the Bretton Woods System, the task of “rigorous monitoring” the exchange rate policy of member countries fell on the shoulder of IMF.

5. Under normal conditions the stabilizing operations were sufficient to contain short-run fluctuations in a currency’s price within the required bounds of 1% of par value and thereby maintain a system of fixed exchange rates.

Chapter 2

Answers:

word/media/image4.gif. liquid, turnover, due to, hedge, cross trading, electronic broking, outright forwards, Over-the-counter, futures and options, derivatives, remainder.

word/media/image5.gif.. 1. The fundamental changes occurred in post-war world economy. The international flow of commodities, capital and labor is intensifying, thus leading to integration of international markets.

1. Often referred to as “financial institutions with a soul”, credit unions are member-owned cooperatives that offer checking accounts, savings accounts, credit cards, and consumer loans.

2. If you think the price of gold will rise, you can buy a most simple kind of financial derivative which is called “futures”. If by that time the price really goes up, then you make a gain. But if you make a wrong guess and the price declines, then you suffer a loss.

3. Financial derivatives are financial commodities deriving from such spot market products as interest rate or bond, foreign exchange or foreign exchange rate and stock or stock indexes. There are mainly three types of derivatives: futures, options and swaps, each of which involves a mix of financial contracts.

4. Companies and investment funds are using basic currency futures and currency options, ones that are regarded as traditional hedging products for investors who want to protect their international assets from sharp gains and declines in currency prices.

Chapter 3

Answers：

word/media/image5.gif. 1. deposit accounts 2. securitization 3. Deregulation 4. consolidation 5. portfolio 6. thrift institutions 7. listing 8. liquidity 9. banking supervision 10. Credit risk

word/media/image6.gif. 1. Depository institutions 2. commercial banks 3. credit analysis 4. working capital 5. consolidation 6. financing 7. moral hazard 8. Bank supervision and regulation 9. Credit risk 10. Liquidity risk

word/media/image3.gif. 1. If a bank’s base rate was below money market rates, a customer could borrow from a bank and lend these funds to the money market, thus making a profit on the deal.

2. Financing of international trade is one of the basic functions of a commercial bank. Not only does it father deposits (demand, time and savings accounts), but it also grants loans.

3. If you have a credit card, you buy a car, eat a dinner, take a trip,a nd even get a haircut by charging the cost to your account.

4. As the central bank and under the leadership of the State Council, the People’s Bank of China will formulate and implement monetary policies, execute supervision and control power over the banking industry.

5. One of major function of the central bank is the supervision of the clearing mechanism. A reliable clearing mechanism which can settle inter-bank transaction with high efficiency is crucial to a well-operated financial system.

Chapter 4 Answers:

word/media/image5.gif. 1．integrity 2. pretext 3. released 4. produce 5. facilities 6. obliged 7. alleging 8. Claims 9. cleared 10. delivery

word/media/image6.gif. 1. in favor of 2. consignment 3. undertaking, terms and conditions 4. cleared 5. regardless of 6. obliged to 7. undervalue arrangement 8. on the pretext of 9. refrain from 10. hinges on

word/media/image3.gif. 1. The objective of documentary credits is to facilitate international payment by making use of the financial expertise and credit worthiness of one or more banks.

2. In compliance with your request, we have effected insurance on your behalf and debited your account with the premium in the amount of $1000.

3. When an exporter is trading regularly with an importer, he will offer open account terms.

4. Exporters usually insist on payment by cash in advance when they are trading with old customers.

5. Cash in advance means that the exporter is paid either when the importer places his order or when the goods are ready for shipment.

Chapter 5.

word/media/image5.gif．1. b 2. c 3. c 4. a 5. b 6. b 7. a 8. c

word/media/image6.gif. 1. guaranteed 2. without recourse 3. defaults 4. on the buyer’s account 5. is equivalent to 6. in question 7. devaluation 8. validity 9. discrepancy 10. inconsistent with

Chapter 6

Answers:

word/media/image1.gif. 1. open account, creditworthiness 2. demand 3. draw on, creditor 4. protest 5. schedule, discrepancies 6. acceptance 7. drawee 8. guranteed

word/media/image2.gif. 1. collecting bank 2. tenor 3. the proceeds 4. protest 5. deferred payment 6. presentation 7. the maturity date 8. a document of title 9. the shipping documents 10. transshipment

word/media/image7.gif. 1. Documentary collection is a method by which the exporter authorizes the bank to collect money from the importer.

2. When a draft is duly presented for acceptance or payment but the acceptance or payment is refused, the draft is said to be dishonored.

3. In the international money market, draft is a circulative and transferable instrument. Endorsement serves to transfer the title of a draft to the transferee.

4. A clean bill of lading is favored by the buyer and the banks for financial settlement purposes.

5. Parcel post receipt is issued by the post office for goods sent by parcel post. It is both a receipt and evidence of dispatch and also the basis for claim and adjustment if there is any damage to or loss of parcels.

Chapter 7

word/media/image5.gif. financing, discounting, factoring, forfaiting, without recourse, accounts receivable, factor, trade obligations, promissory notes, trade receivables, specialized.

word/media/image6.gif. 1. a cash flow disadvantage 2. without recourse 3. negotiable instruments 4. promissory notes 5. profit margin 6. at a discount, maturity, credit risk 7. A bill of exchange, A promissory note

word/media/image3.gif. 1. When a bill is dishonored by non-acceptance or by non-payment, the holder then has an immediate right of recourse against the drawer and the endorsers.

2. If a bill of lading is made out to bearer, it can be legally transferred without endorsement.

3. The presenting bank should endeavor to ascertain the reasons non-payment or non-acceptance and advise accordingly to the collecting bank.

4. Any charges and expenses incurred by banks in connection with any action for protection of the goods will be for the account of the principal.

5. Anyone who has a current account at a bank can use a cheque.

Chapter Eight

Structure of the Foreign Exchange Market

外汇市场的构成

1. Key Terms

1）foreign exchange：

“Foreign exchange” refers to money denominated in the currency of another nation or group of nations.

2）payment

“payment” is the transmission of an instruction to transfer value that results from a transaction in the economy.

3）settlement

“settlement” is the final and unconditional transfer of the value specified in a payment instruction.

2. True or False

1) true 2) true 3) true 4) true

3. Cloze

1) The dollar is by far the most widely traded currency. In part, the widespread use of the dollar reflects its substantial international role as: “investment” currency in many capital markets, “reserve” currency held by many central banks, “transaction” currency in many international commodity markets, “invoice” currency in many contracts, and “intervention” currency employed by monetary authorities in market operations to influence their own exchange rates. In addition, the widespread trading of the dollar reflects its use as a “vehicle” currency in foreign exchange transactions, a use that reinforces, and is reinforced by, its international role in trade and finance.

2） In foreign exchange trading, London benefits not only from its proximity to major Eurocurrency credit markets and other financial markets, but also from its geographical location and time zone. In addition to being open when the numerous other financial centers in Europe are open, London's morning hours overlap with the late hours in a number of Asian and Middle East markets; London's afternoon sessions correspond to the morning periods in the large North American market. Thus, surveys have indicated that there is more foreign exchange trading in dollars in London than in the United States.

4. Discussions

1) Tell the reasons why the dollar is the market's most widely traded currency?

key points: U.S.A economic background; the leadership of USD in the world economy ; the role it plays in investment , trade, etc.

2) What kind of market is the foreign exchange market?

Make reference to the following parts:（8.7 The Market Is Made Up of An International Network of Dealers）

Chapter 9

Instruments

交易工具

1. Key Terms

1) spot transaction

A spot transaction is a straightforward (or “outright”) exchange of one currency for another. The spot rate is the current market price, the benchmark price.

Spot transactions do not require immediate settlement, or payment “on the spot.” By convention, the settlement date, or “value date,” is the second business day after the “deal date” (or “trade date”) on which the transaction is agreed to by the two traders. The two-day period provides ample time for the two parties to confirm the agreement and arrange the clearing and necessary debiting and crediting of bank accounts in various international locations.

2) American terms

The phrase “American terms” means a direct quote from the point of view of someone located in the United States. For the dollar, that means that the rate is quoted in variable amounts of U.S. dollars and cents per one unit of foreign currency (e.g., $1.2270 per Euro).

3) outright forward transaction

An outright forward transaction, like a spot transaction, is a straightforward single purchase/ sale of one currency for another. The only difference is that spot is settled, or delivered, on a value date no later than two business days after the deal date, while outright forward is settled on any pre-agreed date three or more business days after the deal date. Dealers use the term “outright forward” to make clear that it is a single purchase or sale on a future date, and not part of an “FX swap”.

4) FX swap

An FX swap has two separate legs settling on two different value dates, even though it is arranged as a single transaction and is recorded in the turnover statistics as a single transaction. The two counterparties agree to exchange two currencies at a particular rate on one date (the “near date”) and to reverse payments, almost always at a different rate, on a specified subsequent date (the “far date”). Effectively, it is a spot transaction and an outright forward transaction going in opposite directions, or else two outright forwards with different settlement dates, and going in opposite directions. If both dates are less than one month from the deal date, it is a “short-dated swap”; if one or both dates are one month or more from the deal date, it is a “forward swap.”

5) put-call parity

“Put-call parity” says that the price of a European put (or call) option can be deduced from the price of a European call (or put) option on the same currency, with the same strike price and expiration. When the strike price is the same as the forward rate (an “at-the-money” forward), the put and the call will be equal in value. When the strike price is not the same as the forward price, the difference between the value of the put and the value of the call will equal the difference in the present values of the two currencies.

2. True or False

1) true 2) true 3) true

3. Cloze

1) Traders in the market thus know that for any currency pair, if the base currency earns a higher interest rate than the terms currency, the currency will trade at a forward discount, or below the spot rate; and if the base currency earns a lower interest rate than the terms currency, the base currency will trade at a forward premium, or above the spot rate. Whichever side of the transaction the trader is on, the trader won't gain (or lose) from both the interest rate differential and the forward premium/discount. A trader who loses on the interest rate will earn the forward premium, and vice versa.

2) A call option is the right, but not the obligation, to buy the underlying currency, and a put option is the right, but not the obligation, to sell the underlying currency. All currency option trades involve two sides—the purchase of one currency and the sale of another—so that a put to sell pounds sterling for dollars at a certain price is also a call to buy dollars for pounds sterling at that price. The purchased currency is the call side of the trade, and the sold currency is the put side of the trade. The party who purchases the option is the holder or buyer, and the party who creates the option is the seller or writer. The price at which the underlying currency may be bought or sold is the exercise , or strike, price. The option premium is the price of the option that the buyer pays to the writer. In exchange for paying the option premium up front, the buyer gains insurance against adverse movements in the underlying spot exchange rate while retaining the opportunity to benefit from favorable movements. The option writer, on the other hand, is exposed to unbounded risk— although the writer can (and typically does) seek to protect himself through hedging or offsetting transactions.

4. Discussions

1) What is a derivate financial instrument? Why is traded?

2) Discuss the differences between forward and futures markets in foreign currency.

3) What advantages do foreign currency futures have over foreign currency options?

4) What is meant if an option is “in the money”, “out of the money”, or “at the money”?

5) What major international contracts are traded on the Chicago Mercantile Exchange ? Philadelphia Stock Exchange?

Chapter 10

Managing Risk in Foreign Exchange Trading

外汇市场交易的风险管理

1. Key Terms

1) Market risk

Market risk, in simplest terms, is price risk, or “exposure to (adverse) price change.” For a dealer in foreign exchange, two major elements of market risk are exchange rate risk and interest rate risk—that is, risks of adverse change in a currency rate or in an interest rate.

2) VAR

VAR estimates the potential loss from market risk across an entire portfolio, using probability concepts. It seeks to identify the fundamental risks that the portfolio contains, so that the portfolio can be decomposed into underlying risk factors that can be quantified and managed. Employing standard statistical techniques widely used in other fields, and based in part on past experience, VAR can be used to estimate the daily statistical variance, or standard deviation, or volatility, of the entire portfolio. On the basis of that estimate of variance, it is possible to estimate the expected loss from adverse price movements with a specified probability over a particular period of time (usually a day).

3) credit risk

Credit risk, inherent in all banking activities, arises from the possibility that the counterparty to a contract cannot or will not make the agreed payment at maturity. When an institution provides credit, whatever the form, it expects to be repaid. When a bank or other dealing institution enters a foreign exchange contract, it faces a risk that the counterparty will not perform according to the provisions of the contract. Between the time of the deal and the time of the settlement, be it a matter of hours, days, or months, there is an extension of credit by both parties and an acceptance of credit risk by the banks or other financial institutions involved. As in the case of market risk, credit risk is one of the fundamental risks to be monitored and controlled in foreign exchange trading.

4) legal risks

There are legal risks, or the risk of loss that a contract cannot be enforced, which may occur, for example, because the counterparty is not legally capable of making the binding agreement, or because of insufficient documentation or a contract in conflict with statutes or regulatory policy.

2. True or False

1) True 2) true

3. Translation

1) Broadly speaking, the risks in trading foreign exchange are the same as those in marketing other financial products. These risks can be categorized and subdivided in any number of ways, depending on the particular focus desired and the degree of detail sought. Here, the focus is on two of the basic categories of risk—market risk and credit risk (including settlement risk and sovereign risk)—as they apply to foreign exchange trading. Note is also taken of some other important risks in foreign exchange trading—liquidity risk, legal risk, and operational risk

2) It was noted that foreign exchange trading is subject to a particular form of credit risk known as settlement risk or Herstatt risk, which stems in part from the fact that the two legs of a foreign exchange transaction are often settled in two different time zones, with different business hours. Also noted was the fact that market participants and central banks have undertaken considerable initiatives in recent years to reduce Herstatt risk.

4. Discussions

2) Discuss the way how VAR works in measuring and managing market risk?

3) Why are banks so interested in political or country risk?

4) Discuss other forms of risks which you know in foreign exchange.

Chapter 11

The Determination of Exchange Rates

汇率的决定

1. Key Terms

1) PPP

Purchasing Power Parity (PPP) theory holds that in the long run, exchange rates will adjust to equalize the relative purchasing power of currencies. This concept follows from the law of one price, which holds that in competitive markets, identical goods will sell for identical prices when valued in the same currency.

2) the law of one price

The law of one price relates to an individual product. A generalization of that law is the absolute version of PPP, the proposition that exchange rates will equate nations' overall price levels.

3) FEER

“fundamental equilibrium exchange rate,” or FEER, envisaged as the equilibrium exchange rate that would reconcile a nation's internal and external balance. In that system, each country would commit itself to a macroeconomic strategy designed to lead, in the medium term, to “internal balance”—defined as unemployment at the natural rate and minimal inflation—and to “external balance”—defined as achieving the targeted current account balance. Each country would be committed to holding its exchange rate within a band or target zone around the FEER, or the level needed to reconcile internal and external balance during the intervening adjustment period.

4) monetary approach

The monetary approach to exchange rate determination is based on the proposition that exchange rates are established through the process of balancing the total supply of, and the total demand for, the national money in each nation. The premise is that the supply of money can be controlled by the nation's monetary authorities, and that the demand for money has a stable and predictable linkage to a few key variables, including an inverse relationship to the interest rate—that is, the higher the interest rate, the smaller the demand for money.

5) portfolio balance approach

The portfolio balance approach takes a shorter-term view of exchange rates and broadens the focus from the demand and supply conditions for money to take account of the demand and supply conditions for other financial assets as well. Unlike the monetary approach, the portfolio balance approach assumes that domestic and foreign bonds are not perfect substitutes. According to the portfolio balance theory in its simplest form, firms and individuals balance their portfolios among domestic money, domestic bonds, and foreign currency bonds, and they modify their portfolios as conditions change. It is the process of equilibrating the total demand for, and supply of, financial assets in each country that determines the exchange rate.

2. True or False

1) true 2) true

3. Cloze

1）PPP is based in part on some unrealistic assumptions: that goods are identical; that all goods are tradable; that there are no transportation costs, information gaps, taxes, tariffs, or restrictions of trade; and —implicitly and importantly—that exchange rates are influenced only by relative inflation rates. But contrary to the implicit PPP assumption, exchange rates also can change for reasons other than differences in inflation rates. Real exchange rates can and do change significantly over time, because of such things as major shifts in productivity growth, advances in technology, shifts in factor supplies, changes in market structure, commodity shocks, shortage, and booms.

2） Each individual and firm chooses a portfolio to suit its needs, based on a variety of considerations—the holder's wealth and tastes, the level of domestic and foreign interest rates, expectations of future inflation, interest rates, and so on. Any significant change in the underlying factors will cause the holder to adjust his portfolio and seek a new equilibrium. These actions to balance portfolios will influence exchange rates.

4. Discussions

1） How does the purchasing power parity work?

2） Describe and discuss one model for forecasting foreign exchange rates.

3） Make commends on how good are the various approaches mentioned in the chapter.

4） Central banks occasionally intervene in foreign exchange markets. Discuss the purpose of such intervention. How effective is intervention?

Chapter 12

The Financial Markets

金融市场

1. Key Terms

1）money market

The money market is really a market for short-term credit, or the option to use someone else's money for a period of time in return for the payment of interest. The money market helps the participants in the economic process cope with routine financial uncertainties. It assists in bridging the differences in the timing of payments and receipts that arise in a market economy.

2）capital market

Markets dealing in instruments with maturities that exceed one year are often referred to as capital markets.

3）primary market

The term “primary market” applies to the original issuance of a credit market instrument. There are a variety of techniques for such sales, including auctions, posting of rates, direct placement, and active customer contacts by a salesperson specializing in the instrument

4） secondary market

Once a debt instrument has been issued, the purchaser may be able to resell it before maturity in a “secondary market.” Again, a number of techniques are available for bringing together potential buyers and sellers of existing debt instruments. They include various types of formal exchanges, informal telephone dealer markets, and electronic trading through bids and offers on computer screens. Often, the same firms that provide primary marketing services help to create or “make” secondary markets.

5） RPs

In addition to making outright purchases and sales in the secondary market, entities with money to invest for a brief period can acquire a security temporarily, and holders of debt instruments can borrow short term by selling securities temporarily. These two types of transactions are repurchase agreements (RPs) and reverse RPs, respectively. In the wholesale market, banks and government securities dealers offer RPs at competitive rates of return by selling securities under contracts providing for their repurchase from one day to several months later

6） BAs 7） CDs (reference to 13.1)

8） Eurodollar

Eurodollars are U.S. dollar deposits at banking offices in a country other than the United States.

9） Eurobank

Eurobanks—banks dealing in Eurodollar or some other nonlocal currency deposits, including foreign branches of U.S. banks— originally held deposits almost exclusively in Europe, primarily London. While most such deposits are still held in Europe, they are also held in such places as the Bahamas, Bahrain, Canada, the Cayman Islands, Hong Kong, Singapore, and Tokyo, as well as other parts of the world.

10）LIBOR (reference to 13.2.2 Certificates of Deposit)

London inter-bank offer rate

11）mortgage-backed securities

12）Eurobond market (details make reference to13.3.3 )

The Eurobond market, centered in London, is an offshore market in intermediate- and long-term debt issues. It serves as a source of capital for multinational corporations and for foreign governments. It developed after the United States instituted the interest equalization tax in 1963 to stem capital outflows inspired by relatively low U.S. interest rates.

2. True or False

1) true 2) true 3) true

3. Discussions

1) Describe the characteristics of Interest Rate Swap and the role of it in the bank-related financial market.

2) What risks are encountered in the swaps markets?

3) Discuss one or two specific examples of derivative products and their use.

4. Translations

1) Markets dealing in instruments with maturities that exceed one year are often referred to as capital markets, since credit to finance investments in new capital would generally be needed for more than one year. The time division is arbitrary. A long-term project can be started with short-term credit, with additional instruments may need to be renewed before a project is completed. Debt instruments that differ in maturity share other characteristics. Hence, the term “capital market” could be –and occasionally is applied to some shorter maturity transactions.

2) The secondary market for Treasure securities consists of a network of dealers, brokers, and investors who effect transactions either by telephone or electronically. Telephone trades are generally between dealers and their customers. Electronics trading is arranged through screen-based systems provided by some of the dealers to their customers. It allows selected trades to take place without a conversation. When dealers trade with each other, they generally use brokers. Brokers provide information on screen, but the final trades are made by telephone.

Chapter 13

Concepts of Financial Assets Value

金融资产价值的概念

1. Key Terms

1) absolute measure of value

An absolute measure of value is used when one must compare it to a nominal amount: purchase price, amount to invest, target sum of money to raise

2) relative measure of value

A relative measure of rate of return is more convenient to use when one wishes to compare one financial asset to a set of numerous alternative assets. A rate of return is the most commonly used relative measure of value.

3) discounting

Future benefits must be discounted (or converted) to their present (or today's) value, before they are summed. Discounting is part of the study of time value of money, or actuarial mathematics, and a complete treatment of it can be found in specialized textbook.

4) time value of money

Time value of money studies how amounts of money are made equivalent over time. Converting amounts today into their future equivalent consists in adding interest to principal, i.e. compounding. Converting amounts in the future into today's equivalent consists of charging an interest, i.e. discounting. Thus, discounting is the exact inverse of compounding.

5) FV 6) PV 7) annuity

8) short term securities

Short term securities (i.e. securities with maturity less than one year) are sold at a discount (i.e. nominal value less the interest to be earned over the remaining number of days to maturity). There is no coupon, and no additional benefits such as conversion right, but there may be a penalty for early redemption in the case of some bank certificates of deposit.

9) P/E ratio (make reference to 15.5.3 --Earnings Multiple or P/E Ratio)

Another approach which is used as a short-cut by a large number of investors, is the earnings multiple. It is sometimes referred to as earnings multiplier, and it is most commonly known as price-to-earnings or P/E ratio. In many instances, the approach, rather than being an oversimplification, can be an improvement over the previous format. In its most common presentation, the idea is that the price P of a share should be a multiple m of its earnings per share E. The multiple m is an industry average because it is assumed that all companies in an industry face similar marketing, technological and resource challenges, and thus, should have similar organizational and production patterns.

10) intrinsic value

intrinsic value, or difference between market price of the underlying stock and strike price (which is also known as exercise price because it is the price at which an option holder can buy from or sell to the option writer the underlying stock through the options exchange)。

11) NPV

Any financial decision can be looked upon as a determination of whether what is put in today (i.e. purchase price of a stock, amount of loan applied for or initial outlay of a project) is greater or smaller than what is received back (i.e. discounted value of future benefits). This approach is known as net present value (NPV) calculation. Net present value is most specifically used for selecting capital projects. The format for NPV formula is a mere extension of the general formula of value, and its logic is appropriate for all financial decisions. NPV of a project is given by the formula

NPV = Sum(PV(Ct) )- I0

12) IRR

An alternative capital budgeting approach is to calculate the total rate of return earned from the project. This return is called internal rate of return (IRR). It is the same concept as yield to maturity of bonds. IRR is that specific discount rate for which the combined discounted benefits equal initial outlay; in other words, NPV is zero.

13) cost-benefit analysis

A cost-benefit analysis is a ratio of costs divided by benefits. The traditional cost-benefit analysis, which does not involve discounting, used to be the most common method in capital budgeting. A modern version, where costs and benefits are discounted, is exactly the inverse of profitability index.

14) cost of capital (make reference to15.7.1 Rate of Return to Be Used in Mergers and Acquisitions)

15) PI

The profitability index PI is calculated as a ratio of the sum of present values of cash flows, divided by the initial outlay.

PI = Sum(PV(Ct) )/ I0

Chapter 14

Analytical Tools

分析工具

1. Key Terms

1．Time-series analysis

Time-series analysis is a special but important type of nonlinear regression analysis. What is special is that the exogenous variable is the endogenous variable itself. In other words, what was previously called autocorrelation and looked upon as a disturbance that must be removed, is analyzed here as the source of an informative signal.

2．Delphi process

Another technique consists in informing survey participants about partial results obtained from other participants. This encourages convergence toward a consensus forecast. To avoid stubborn outliers, the median rather than mean is chosen as the resulting forecast. This is called the Delphi process.

3．Monte Carlo simulation （make reference to notes 11）

4．market research

Market research is naturally not a finance or economics procedure, but a marketing one. It is included here in tools of the trade of a financial analyst because understanding product sales patterns and being able to anticipate changes in such patterns is the most important investigation. And to do that, nothing is more informative than getting answers directly from customers.

5．chartist

Those engaged in this approach are sometimes called chartists because they study charts (i.e. graphs) of stock prices and/or indexes over time. Their view is that fundamental analysis is a waste of time because it is not possible to measure the value of a stock: it changes all the time in response to economic and market forces. What is more important than any “true” value is the direction and size of price changes: that is what is called price momentum. Their answer to modern portfolio theorists is that they do not only use past price changes but also many other techniques. It is from this use of techniques that the name of technical analysis originated.

2. Discussions

1) Which two sets of data must be studied by a financial analyst?

2) What is the purpose of the expert opinion approach?

3) Why is market research important for financial analysis?

4) What is the common tool of market research?

5) Who are the major users of technical analysis?