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Financial Risk Management
Financial risk management is the practice of protecting economic value in a firm by using financial instruments to manage exposure to financial risk - principally operational risk, credit risk and market risk, with more specific variants as listed aside. As for risk management more generally, financial risk management requires identifying its sources, measuring it, and the plans to address them. See for an overview. Financial risk management as a "science" can be said to have been born with modern portfolio theory, particularly as initiated by Professor Harry Markowitz in 1952 with his article, "Portfolio Selection"; see . Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk. *In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, repo ...
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Financial Economics
Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade". William F. Sharpe"Financial Economics", in Its concern is thus the interrelation of financial variables, such as share prices, interest rates and exchange rates, as opposed to those concerning the real economy. It has two main areas of focus:Merton H. Miller, (1999). The History of Finance: An Eyewitness Account, ''Journal of Portfolio Management''. Summer 1999. asset pricing, commonly known as "Investments", and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital. It thus provides the theoretical underpinning for much of finance. The subject is concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment".See Fama ...
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Value (economics)
In economics, economic value is a measure of the benefit provided by a good or service to an economic agent. It is generally measured through units of currency, and the interpretation is therefore "what is the maximum amount of money a specific actor is willing and able to pay for the good or service"? Among the competing schools of economic theory there are differing theories of value. Economic value is ''not'' the same as market price, nor is economic value the same thing as market value. If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price. The difference between the value to the consumer and the market price is called " consumer surplus". It is easy to see situations where the actual value is considerably larger than the market price: purchase of drinking water is one example. Overview The economic value of a good or service has puzzled economists since the beginning of the discipline. First, e ...
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Internal Audit
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Internal auditing might achieve this goal by providing insight and recommendations based on analyses and assessments of data and business processes. With commitment to integrity and accountability, internal auditing provides value to governing bodies and senior management as an objective source of independent advice. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. The scope of internal auditing within an organization may be broad and may involve topics such as an organization's governance, risk management and management controls over: efficiency/effectiveness of operations (incl ...
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Modigliani–Miller Theorem
The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an Efficient-market hypothesis, efficient market, the enterprise value of a firm is unaffected by how that firm is financed. This is not to be confused with the value of the equity of the firm. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing share capital, shares or selling debt, the Modigliani–Miller theorem is often called the capital structure irrelevance principle. The key Modigliani–Miller theorem was developed in a world without taxes. However, if we move to a world where there are taxes, when the interest on debt is tax deduction, tax-deductible, and ignoring other frictions, the value of the company increases in ...
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Bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor. Bankrupt is not the only legal status that an insolvent person may have, and the term ''bankruptcy'' is therefore not a synonym for insolvency. Etymology The word ''bankruptcy'' is derived from Italian ''banca rotta'', literally meaning "broken bank". The term is often described as having originated in renaissance Italy, where there allegedly existed the tradition of smashing a banker's bench if he defaulted on payment so that the public could see that the banker, the owner of the bench, was no longer in a condition to continue his business, although some dismiss this as a false etymology. History In Ancient Greece, bankruptcy did not exist. If a man owed and he could not pay, he and his wife, children or servants were forced into ...
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Shareholder Value
Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value". Definition The term "shareholder value", sometimes abbreviated to "SV", can be used to refer to: *The market capitalization of a company; *The concept that the primary goal for a company is to increase the wealth of its shareholders (owners) by paying dividends and/or causing the stock price to increase (i.e. the Friedman doctrine introduced in 1970); *The more specific concept that planned actions by management and the returns to shareholders should outperform certain bench-marks such as the cost of capital concept. In essence, the idea that shareholders' money should be used to earn a higher return than they could earn themselves by investing in other assets having the same amount of risk. The term in this sense was introduced by Alfred Rappaport in 1986. For ...
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MIT OpenCourseWare
MIT OpenCourseWare (MIT OCW) is an initiative of the Massachusetts Institute of Technology (MIT) to publish all of the educational materials from its undergraduate- and graduate-level courses online, freely and openly available to anyone, anywhere. The project was announced on April 4, 2001, and uses Creative Commons Attribution-NonCommercial-ShareAlike license. The program was originally funded by the William and Flora Hewlett Foundation, the Andrew W. Mellon Foundation, and MIT. Currently, MIT OpenCourseWare is supported by MIT, corporate underwriting, major gifts, and donations from site visitors. The initiative inspired a number of other institutions to make their course materials available as open educational resources. , over 2,400 courses were available online. While a few of these were limited to chronological reading lists and discussion topics, a majority provided homework problems and exams (often with solutions) and lecture notes. Some courses also included inter ...
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Fisher Separation Theorem
In economics, the Fisher separation theorem asserts that the primary objective of a corporation will be the maximization of its present value, regardless of the preferences of its shareholders. The theorem therefore separates management's "productive opportunities" from the entrepreneur's "market opportunities". It was proposed by—and is named after—the economist Irving Fisher. The theorem has its "clearest and most famous expositionin the ''Theory of Interest'' (1930); particularly in the "second approximation to the theory of interest"II:VI. {{Ref improve section, date=January 2011 The Fisher separation theorem states that: * the firm's Corporate_finance#The_investment_decision, investment decision is independent of the consumption preferences of the owner; * the investment decision is independent of the financing decision. * the value of a capital project (investment) is independent of the mix of methods – equity, debt, and/or cash – used to finance the project. Fi ...
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Theory Of The Firm
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as Transaction cost theory, Managerial economics and Behavioural theory of the firm will allow for an in-depth analysis on various firm and management types. Overview In simplified terms, the theory of the firm aims to answer these questions: # Existence. Why do firms emerge? Why are not all transactions in the economy mediated over the market? # Boundaries. Why is the boundary between firms and the market located exactly there in relation to size and output var ...
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Investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is to generate a return from the invested asset. The return may consist of a gain (profit) or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), or investment income such as dividends, interest, or rental income, or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates. Investors generally expect higher returns from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high losses. Investors, particularly novices, are often advised to diversify their portfolio. Diversification has the statistical effe ...
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Management
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees (or of volunteers) to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. "Run the business" and "Change the business" are two concepts that are used in management to differentiate between the continued delivery of goods or services and adapting of goods or services to meet the changing needs of customers - see trend. The term "management" may also refer to those people who manage an organization—managers. Some people study management at colleges or universities; major degrees in management includes the Bachelor of Commerce (B.Com.), Bachelor of Busines ...
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Shareholder
A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal owner of shares of the share capital of a public or private corporation. Shareholders may be referred to as members of a corporation. A person or legal entity becomes a shareholder in a corporation when their name and other details are entered in the corporation's register of shareholders or members, and unless required by law the corporation is not required or permitted to enquire as to the beneficial ownership of the shares. A corporation generally cannot own shares of itself. The influence of a shareholder on the business is determined by the shareholding percentage owned. Shareholders of a corporation are legally separate from the corporation itself. They are generally not liable for the corporation's debts, and the shareholders' li ...
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