garvia.es

Student Recap — November 12, 2025

🧭 1) Overview

Today’s class marks a turning point in the course:
we have finished the “institutional and stability” block — focused on banks, supervision, and regulation — and we are now moving into the “markets and instruments” block, where we’ll study risk, return, and valuation.

So far we have covered:

Monetary policy (ECB, Fed, Bank of Japan, etc.)
Supervision map (banks, markets, insurance)
Banking business (credit, liquidity, market risk)
Basel I–III and the role of trust and stability

From now on, we will focus on:

Financial markets — how assets are traded
Fixed income and duration
Stocks, derivatives, and funds
Platforms, digital markets, and the new financial architecture

💰 2) Transition from Stability → Markets

The first half of the course built the map — institutions that create financial stability.
The second half focuses on movement — the forces of risk, return, and market dynamics.

Why do we need stability?
Because only over stability can we build growth, competition, and investment.

📊 3) What We Covered Today

3.1 — What Is a Market?

A market is a place (physical or digital) where buyers and sellers exchange goods, services, or financial instruments under specific rules and supervision.
Historically, stock exchanges like the Madrid Stock Exchange were physical spaces filled with traders shouting orders.
Today, they are digital platforms — algorithmic, global, and mostly invisible.

Analogy: The same transformation that turned cars into “platforms” (Tesla) or stores into “platforms” (Amazon) also happened to finance.

Examples:

NYSE – New York Stock Exchange
NASDAQ – tech-oriented platform
BME (Spain) – integrated system for stocks, bonds, and futures
Korea Exchange (KRX) – modern digital exchange combining multiple markets

Key idea:

A financial market is no longer a building — it’s a technological platform that connects needs and savings, buyers and sellers.

3.2 — Financial Assets & Instruments

A financial asset is an intangible asset whose value comes from a contractual claim.
It represents a relationship between issuer and investor — one’s liability is another’s asset.

Main features:

Risk
Return
Liquidity

Examples:

Type	Description
Fixed Income (Bonds)	Investor lends money for interest; predictable returns.
Equities (Stocks)	Ownership; higher risk, higher return.
Derivatives	Value derived from another asset (future, option, swap).

3.3 — Primary & Secondary Markets

Primary market: when a financial instrument is issued for the first time
→ e.g. IPO (Initial Public Offering) for stocks, or Treasury auctions for bonds.
Secondary market: where existing instruments are traded later.
→ e.g. buying or selling a bond on the open market.

Example:

In the U.S. Treasury auction, investors bid for new bonds (primary market).
The next day, they can resell them at market prices (secondary market), and this continuous trading forms the yield curve — a map of interest rates by maturity.

3.4 — Bond Pricing & Duration (Review)

How to price a bond:

Identify future cash flows (coupons + principal).
Discount them at the market yield.
Sum all present values.

Example:
A 3-year bond, face value €1,000, coupon 10%, yield 9%
→ Price ≈ €1,025 (above par because yield < coupon).

If yield ↑ → price ↓
If yield ↓ → price ↑

Duration

Measures interest rate sensitivity — how much a bond’s price changes if rates change.
Calculated as a weighted average of payment times.
In our example: duration ≈ 2.74 years.
Also expressed as modified duration, which gives the % price change per 1% rate move:
→ If rates rise 1%, price falls ≈ 2.5%.

Duration in practice:

Used by banks to match assets and liabilities (Asset-Liability Management, ALM).
Goal: immunize the balance sheet — make it neutral to interest rate movements.

Key sentence:
“If the duration of assets = duration of liabilities, your balance sheet is immunized.”

3.5 — Banking vs. Investment Funds

Aspect	Bank	Investment Fund
What they take	Deposits	Investor money
Obligation	Don’t need to disclose how deposits are used	Must publish Prospectus
Return	Fixed, stable	Variable, depends on markets
Protection	Deposits insured (FDIC, up to $250,000)	No guarantees; investors bear risk

Prospectus:
A legal document explaining how the fund will invest your money, required by the SEC (U.S.) or CNMV (Spain) before the fund is sold.

3.6 — Platforms, Attention & Generations

A more philosophical reflection:

The Industrial Age was about factories; the Digital Age is about platforms.
Education, finance, media — all are now attention platforms.
The question for all of us:

Where is your attention?
Are you aware of the platform you are part of?

“Knowing where you want to go is the first rule in business and in life.”

3.7 — Europe: Fiscal & Monetary Divide

European Union ≠ Monetary Union.
There is one monetary policy (ECB) but many fiscal policies (national budgets).
→ This creates inefficiency and imbalance.

Referenced two reports:

Mario Draghi Report (2023): invest more in tech and productivity.
Enrico Letta Report (2024): push for a single European financial market.

Key takeaway:
Europe lacks integration, innovation, and unicorns compared to the U.S. and Asia.

3.8 — Risk, Return & Uncertainty

Finance = managing uncertainty
Banking = stability
Markets = risk and return

Credit risk: possibility of default.
Interest rate risk: price moves opposite to yields.
Liquidity risk: inability to sell or withdraw.
Systemic risk: contagion through the system.

Governments are assumed not to default — their bonds are considered risk-free assets, which anchor the entire financial system.

3.9 — From Fixed Income to Equities

Next, we’ll explore stocks and derivatives.
For now, remember the basic bond types:
- Bills: short-term, zero-coupon (e.g. Treasury bills).
- Bonds: long-term, coupon-paying.
- Convertible bonds: can turn into shares (less liquid, higher complexity).

🧠 4) What You Should Review Before Next Class

Know how to calculate a bond price given yield and coupons.
Understand and calculate duration (both Macaulay and modified).
Be clear about the difference between:
- Banks and investment funds
- Primary and secondary markets
- Traders and brokers
Understand platforms: why modern finance (like Amazon or Tesla) is a platform economy.
Reflect on risk, return, and liquidity — the three pillars of all investment.

📆 5) Coming Next

In the next sessions:

Stocks and Equity Markets
Risk-return models (CAPM, Sharpe ratio, Beta)
Introduction to derivatives
Corporate finance and valuation links

✨ 6) Key Takeaways

Fixed income = stability, stocks = growth, derivatives = control.
Duration connects banking and markets.
Prospectus = transparency, license = trust.
Europe’s challenge is integration; America’s strength is scale.
And finally:

“In finance and in life — you can’t predict the future, but you can prepare for it.”

Transcript

Grabación de la reunión de Nueva reunión-20251112_103249

12 de noviembre de 2025, 10:32a.m.

1 h 28 min 30 s

My exams are Monday and then nothing Tuesday.
File boss.
OK. Today we will start with today we will start talking about markets, markets.
The course can be considered to be divided into two parts, one first part, one first part has to do with stability, has to do with banking.
Has to do with, let me call it the map. Yes, where we are, where we are. First three lessons were dedicated to talk about monetary policy. We have been talking about monetary policy and we have been talking about.
The parks financial system is divided in two. What are the parks financial system is divided in two?
Which parts? Absolutely. And why we do this division? Why we do this division?
Why? Because each part has its supervisor. Each part has its supervisor. Yes, thinking about the place who supervise markets.
Thinking about the states, who supervise markets? Thinking about the states, who supervise banking system? And then regarding insurance, I don’t care too much about the insurance in this course.
But insurance exists and insurance has to do with financial assistance and insurance is being supervised by in the case of the states FDIC, but I don’t care about.
What is the name of the police in your company? I care about you to know that there is police no matter in which part of the world you are, if you are a small investor.
You have someone to call in case your rights are being harmed. So financial system is divided into three parts and also there is something called monetary policy.
Who is in charge of monetary policy? Same as the supervisor of accounting system.
5th in the case of the state, ECB in the case of Europe, the Refanking in the case of Sweden.
And in the case of Japan or a Bank of Japan, in the case of Korea, there is one central bank for each currency and at the same time, at the same time.
Central bank supervise banking system and also central bank supervise monetary policy and also central bank supervise to markets has to do with monetary policy that are.
The public debt market and also the internal market. Yep. So first three lessons. I have dedicated first three lessons to talk about the map.
Monetary policy.
Financial system supervisor and not only we talk about that, also we talk about traders, we talk about brokers, we talk about lot of concepts, yes.
Then we dedicate one more lesson to talk about banks. I’m talking about banks. We talk about Bassel, Bassel regulation and we talk about what is risk regarding banking. Yep, so.
With this, we close. We close.
One part of the course that has been dedicated to talk about institutions, to talk about the math, to talk about.
A static situation. Static a situation that looks for peace. Make sense?
Do we need peace? Yes. But why do we need peace? In order to construct over that stability? We’ve got stability and over that stability we construct.

We need stability and over that the stability we are going to construct. What are we gonna talk about today, next day until the end of the course?
We are going to talk about markets. What is being trade in markets?
Why is in trading markets?
And how do we call assets in this class, financial instruments, because it’s an asset for the owner, but it’s a liability for the issuer. But at the end, financial assets and today we will talk about fixed income markets.
If I say fix income, what you should think about?
I say fixed income bonds and if I say bond bonds in this course what you should know.
I say balls, but you should know.
I say balls thinking about the final final exam, Marco.
If I say bones, what you should know?
And what else did you know?
Regarding votes, what is going to be asked in the final that has been asked in the meeter? Yeah, Cucconi.
I mean, no, I mean, if I ask him, this is can I see things?
Take us the exam. It should be done in an individual way because if you want, you understand what I’m saying.
And I’m not asking for really complicated things. I am asking yes for these things.
If there are phrases and you are on the correct way. If there are phrase sensitivity, hold who we call it. No. Yes, all of you should know.
What is duration? Today we are going to review it and all of you should know how to calculate duration and duration is something. In the final you will be asked to do one exercise and what is the question that will be asked in this exercise?
Something regarding the duration of above. Something regarding the duration of above. What is above? Something that is been trading fixed income markets and duration has to do with interest rate sensitivity.
What are we going to do today? We are going to review how to calculate the ratio, but we have seen this in class at least two more times and I told you that I was going to ask this for the midterm and at the end of the midterm I asked something.
Now that’s complicates how to calculate a net percent value of one gas flow.
Coming back, two parts of the course, one part that we gave to talk about the system, yes.
The system savings, financial needs, ECB, SCC, supervisors and then banking business. Regarding banking, what you should know, you should know what is credit risk, credit risk.
You should know what is liquidity risk. If I say liquidity risk, I’m thinking about banks. What you should think about liquidity risk?
Yes, about running out of money. I need liquidity and if there is not liquidity, what should be a panic? And regarding this panic, a lot of people will start running and OK.
Today we are going to start talking about financial assets, financial markets and also during the course we have talked about the yield curve, we have talked about loans. Today we will continue talking about bonds, stocks and derivatives, yes.
And in this first part, we were talking about institutions, stability and monetary policy. And from now in the end, we will talk about markets, we will talk more about risk and return.
Return. The higher the risk, the higher the return. And we will talk also a little bit about corporate silence, but not too much.
OK. What is a market?
What is a market?
Yeah, market is a place. It should be physical place. It used to be physical place in Madrid. Have you gone to Tibeles?
Do you know what is? Let me show you so quick because you are in Madrid and.
Here is Fideles. Let me show you Fideles. All of you know Fideles or at least have seen this work.
Are you seeing this square?
This is the town, the major town of Madrid, and if you take this, this is Banco de Espana, the money haste.
And if you take this street.
There is another square.
Here is Reeds Hotel. I mean this is the Reeds.
I have lost myself. This is the palace. This is a bus. I’m here.
Here, so here, here is Madrid’s stock exchange.
Madrid Stock Exchange. Let me see if I can see pictures of interior. Not this one. Not this. Oh, this one. You see here.
Don’t like these pictures too much. This one. I like it more. Yes, this is an absolutely.
This is like stock at Saints.
I don’t know what is making noise. It’s my computer. If it’s someone church, please.
This is Madrid, the stogatates that I’m looking for.
I’m looking for an old picture.
I’m looking for an old picture with.
Hey.
1960 now a lot of people used to smoke.
No.
Whatever. Let me just go the easy way.
Traders, London, Riva, yes, something this is I have gone to London because in London we have, we have still some markets that are live with derivatives.
This is.
Something that is not going to exist anymore. There are still some markets where you can see traders, traders. What is a market? It’s a place, but normally where this happens, this happens in the Internet. This happens virtually.
But no more than 2030 years ago, all markets all over the world used to work in a live matter. Can you imagine all these people shouting? And if they shout, you don’t hear how they communicate with each other.
We I buy, I sell or you understand what I’m saying. There were specific times where you have just 10 minutes in order to try to trade utilities and in 10 minutes all the operations should be closed.
Who are these guys? Traders. Traders or brokers? What is a broker? What is the difference between a trader or a broker? We are going to see today the difference between a trader or a broker.
That looking at this picture you can easily see why this different matter. What is the difference between a trader or a broker?
A broker would like to connect two people together just now and the other one is is in their own portfolio. Absolutely a trader, a trader can do all things a broker can do.
A trader can work as a broker, and a broker can only work as an intermediary. A broker cannot buy on his own or her own behalf.
Yet a broker just follow orders and a trader can follow orders but also can buy for himself. Make sense?
A trader can also buy for himself. All these guys, most of them are brokers and most of them has a book of orders and are trying to close the orders they have been told to close, yes.
Now these things happens online and you have digital brokers, you give an order to the digital broker and depending on how the order is being done, is being given, the order can be closed or not.
For example, one kind of order is close it at the best price. If you tell your broker to close at the best price, how the order is going to be happy, how the order is going to be closed so quick. But if you ask your broker close at.
100 It will depend on finding a buyer or a sell it at 100. Make sense depending on the order.
We will talk about orders, but not too much. What is a market? It’s a place where products or service are trade between buyers and sellers that has rules and agents that help, yes.
Who works? We are going to see it with more detail, but who works in a market? Who are these agents? On one hand, we have the police, we have policemen.
On one hand, we have policemen supervisor who is market supervisor.
Who is market supervise? Who supervise the market? The case of the states SEC.
Then we have the market itself. Then we have the market itself, yes.
First idea.
We have S easy. We have the supervisor. Make sense.
Who is the supervisor?
The one that follows that everything works correctly, yes.
We have the market itself.
If you want not name of America.
For example, another one, another one, NASDA. In the case of Spain, the one that I have showed you is.
I I’m gonna follow what?
And why? And why? Look exchange? Yes.
What is NYSE?
What is NYSC?
It’s a company. It’s a public company.
You can buy NYSE stocks where you can buy NYSE stocks.
Where you can buy these stocks?
In NYAC, you understand what I mean? You can buy their stocks in there.
But what is NYC? What is it? Please, I want all your attention. I want all your attention because I’m going to say one word that is absolutely important.
At least I want you to to go out from this class with one word. What is NYSE?
It’s a platform.
A digital platform.
It’s a digital platform. What is Amazon? What is Amazon? It’s a company with stocks, but the power of Amazon is that it’s a platform.
It’s a technical platform. What is Google? A company itself, but it’s also a platform. Google is a platform for advertising.
I’ve showed you. I have showed you thanks to Google Maps, please. No, I’ve showed you thanks to Google Maps, please. And how does Google makes money here? I don’t see.
Here I don’t see another. Here I don’t see another, but probably.
This is not an advert.
Probably the Mandarin has paid. I think that no in this case, but oh, look here.
Yep.
What is Google? A platform.
What is Facebook? What is Meta? What is Instagram?
What is happening?
What is Tesla?
Platform. It says platform. Think about it.
What are you doing at Tesla’s car? You just drive. Well, you have computers you have at the end is a platform itself. It’s a platform that can help you.
If you have, what do you carry in your car? If you own a Tesla, what do you carry together with yourself in the car?
You carry energy, you can trade this energy and also you carry computer computing power.
You carry computer, computer power and you also yourself in the car. You can see videos. You can connect your car with the Internet. You understand what I’m saying. Tesla is not just a car.
Tesla has transformed. What do you have? If the car drives for yourself, what are you going to have in the car? A lot of time in order to do what? In order to consume. So Tesla.
Transform cars into platforms. Xiaomi. Xiaomi car. Oh, Xiaomi car is connected. It’s connected everywhere. You understand what I mean?
This is an important idea. What is New York Stock Exchange a platform?
A technological platform.
What does a platform do? Platform is there. You go to the platform with needs, you go to the platform with savings and you give for or take.
Make sense? Is this important?
What?
What? What used to happen in this place? People talking with another one? Let me show you.
What is this?
This is a market. What is a commercial mall? A market itself? Make sense?
What I’m talking about, what is a market at the end? It’s a platform. What used to be in the industrial world? We are coming from an industrial world. What used to be in the industrial world?
Factories in the industrial world, there used to be factories. What do we have now?
We still have factories, but factories are not as important as platforms.
All of you, what I’m trying to do today, all days, I’m trying to compete with a lot of platforms. How many of you are listening to me? 10%?
52% what the rest of the people is.
Trading their attention with other platforms.
What the university used to be a platform where the professor used to share knowledge.
Is this still?
Something that exists. You are here, but and I’m trying to compete with.
The platforms, what all, almost all of you, almost all of you have in front of you.
Computer that connect. Is everyone doing the same? No, no. But at the end.
There are people. I mean, I’m talking about the statistics, yes, I don’t know and I don’t care. But there are people that their attention, no matter if I get undressed, their attention will be somewhere else.
And among these people, there are people probably that are making a lot of money because they are trading or they are doing whatever. So I’m really happy for them. And there are people probably also that are doing nothing, just looking at cat videos.
Yep. Also there are people that at the same time they are talking with me or they are their attention is given to me. I always have to repeat same thing 10 times. Yes, please. And also I have given you the classes in.
In files with the transcriptions. So once you have this you can at the same time that be attending you can be doing something else.
Is this nice? I don’t know. I mean, I don’t know. But at the end, what is the point now? What is the war? I’ve just told you, I want all of you once you go out from here to know or to think about a little bit platform.
That we have moved from a world where if you wanted to be connected into a platform, you should move into a world that all of us were together with ourselves.
All platforms we want, yes, make sense.
I’m not criticizing.
I’m just trying to describe one reality and I think that I’m not saying something new.
I’m saying something that all of us have been told a lot of times. Where is your attention? Where is your concentration? Where is? Where is? Where is?
But I want you to be aware. Why? Because if you are aware.
Life is going to be so, so, so, so simple, so easy.
But at the end, I want you to know that several things, Mark, what I have told before, I don’t want to repeat, OK, what is a financial asset?
What is a financial asset?
Financial asset is the thing that has been trading the market, yes.
What is an asset? Something that makes you make money? What is your here? Your principal tangible asset? Your computer?
Did you win or your help?
Thanks to the computer, you can be everywhere. You don’t have nor the computer or the telephone. You will be disconnected and you will feel as if you were missing a lot of things. This is an asset.
Does the computer help you make money? Absolutely. Yes. It’s an asset. How do you finance the computer with liabilities? Yes. If you want to make money, what can you buy? Financial assets.
If you want to finance your computer, what can you issue? Financial instruments. In order to get finance, I issue bonds. You give me money. With this money I buy a computer and with the money that I will get, what I will do, I will pay you back.
But you have given me and also I will keep part of my games with myself. Make sense.
What is a financial asset? This an intangible asset? What is? What does intangible mean? Is the computer a? Is the computer a tangible asset or an intangible asset? Tangible and the software that runs on the computer?
A brand is intangible. What is a financial asset? An intangible asset, but where the value of the financial asset derives from? From a contractual plane in the definition.
Of our financial asset.
Value derives, value derives because of a contractual claim. There is a contract, there is a contract and main 3 characteristics are we talk risk.
Risk and liquidity. We don’t risk and liquidity. We have already talked about this, but I don’t care to repeat because at the end financial markets are simple. The more simple, John, the more liquidity, the more liquid at the end financial instruments.
Sorry, financial markets, financial system is absolutely standard.
And the more I teach international students, the more I realize.
The more I teach international students, the more I realize that financial system is absolutely standard.
The more I realize that you call a taxi no matter where you are. Taxi.
And the more I realized that this thing regarding attention, this thing regarding has to do more with generations than with culture, has to do more with everyone because you are somehow because you are young.
You are somehow vaccinated. How do you say vaccine? Vaccinated.
You are somehow vaccinated here now because here is like the day after the vaccine, the vaccination. You understand there is one day that you put the how do you call it vaccine, vaccine the day you put the vaccine.
You are like dead. And once you go outside, thanks to the vaccine, you are vaccinated. Now you are taking the vaccine.
I’m talking for one hour, 2 hours, and you are, yes. So Luis, again, I want to leave. I want to run away. I’m not. I’m not just talking for myself. I’m talking for the whole system. But once you are outside, you know that there are things that are all there are, there are new things who are.
The ones that are not vaccinated, I have to say, I have already said that this has to do with generations, that the problem is not your generation. The problem is mine, my generation that we think, I think.
Your parents thinks, oh, they are at university taking notes. They are in the same university that they used to be. Do you understand what I mean? And I am.
Mhm.
OK. What is a financial instrument, financial asset, intangible asset that there is value because of contract plan and risk is an important word. OK, primary market and secondary market. One best question.
I have already asked, it will be asked and I don’t know if I have asked this question in the midterm or not. How do you call the primary market for stocks?
Is the IPO the IPO process? What is the primary market when you use financial instruments by the first time? Where? I don’t know. I’m not going to look in the Internet for you.
I will bet that is the Treasury. Where can I buy? Where can I buy USA bonds?
Bonds, Treasury bonds, Treasury de Rey. Matures in 30 years. Minimum purchase $100 issue issue 10.
Rise 20 years.
Dress ribbons.
Will sell Treasury. This is government. This is public. Yes, dot go is public, no?
Is anyone, any Americans? John, is this public? Yes. OK. And the point is that imagine I want to buy this one.
OK, perfect. This is what I was looking for. This is the primary market for USA. Who can you buy this? You go to an auction, you go to an auction.
You put your beef at one price and then you will get.
It’s day there is an option for different maturities and what is this the primary market, primary market for public debt?
Once you buy this debt, can you resell it immediately? Why? Because is absolutely liquid. There is a secondary market. Yes, you sell this in the secondary market and what you can.
Calculate with the yields at which these public bonds are being sold each day. What can you calculate? The yield curve. The yield curve has to do with the secondary public market. Make sense.
OK, but I’m married market. Have you have we seen any examples? Yes, what I have just told you and this is a Spanish for example. I’m going to look for Korea.
Gloria.
it’s
Open the Wikipedia and see this one.
Perfect. Korea Exchange was created through the integration of Korea Stock Exchange, Korea’s Future Exchange and.
Korea Stock and Futures is no under there, sorry. The integration of Korea Stock Exchange and Korea Futures Estate is and cost stock stock market. So one stock market, another stock market and one futures exchange, yes.
Why I’m looking at, why I’m looking at Koreas? Because if you look the Spanish, the Spanish market is the the integration of the stock exchange and the future market together with the fixed income.
No matter what stock exchange you see all over the world, there used to be a physical stock exchange market. Then there was created a futures stock exchange and how these markets are nowadays.
Birds.
And what is happening with the stock exchange all over the world, for example, the Spanish stock exchange has been bought by 6 and six is Sweden, Banco New York Stock Exchange, I think that has bought several other stock exchange, yes.
There is a process there and let me see Korea. There are stocks, there are bonds. Also ETFs arbitrate real estates, investment trust arbitrates. So.
I have never seen before Cosby Korea Stock Exchange, but as I can see is much, much modern than the Spanish market. Yes, the Spanish market, Stock Exchange market is not as modern as this one.
And then financial assets trade on capital market. Almost everything can be trade in a almost everything can be trade in a stock exchange. Yep. Any questions?
Let me look for a spin.
OK, I’m thinking I have seen Koreas, England.
Oh, Bolivia. I don’t know if in Bolivia is Bolivia.
OK, thank you. Taking this, this, this, no.
I’m gonna see you soon.
Changing the.
OK, Dabolsa Colibiana is just a stock exchange itself. You can buy yourself stocks.
Hey.
They’re not. I mean there there should be that also will be another this is.
What about? No, I mean a.
Let me look for.
Mm.
At the end, what is La Bolsa? A market. What is La Bolsa? A technological platform. And continuing with this, there is SEC, there is sorry, there is the supervisor.
That is the platform itself. Then if you want to buy, if you want to buy, you cannot buy directly. You should contact a broker or a trader, yes.
Then there are.
Traders or brokers?
Traders.
Traders or brokers and what are these guys, these people? These are.
Alliance that are allowed to trade. Yes, as you see, traders are open. This has to do with.
Individual.
What is an individual? A person itself buying stocks for himself? Yes.
Can I buy stocks?
Can I buy stocks? Yes. But in order to buy stocks, what do I need to have attention or what I’m supposed to have knowledge? Does everyone? Do everyone have knowledge?
No. What I mean is that in order to buy stocks, in order to play with your savings, you need to have knowledge. If you don’t have knowledge, you can instead of.
Bye as an individual.
You can come into collective investment schemes. Have you ever heard about collective investment schemes?
Let me write oh leg. Investment.
Schemes. What is a collective investment scheme? Have you ever had all that?
Collective investment scheme.
You have heard about that, about that that you don’t know. Once I write one word, you would, you would think, oh, I know what you are talking about. What is a collective investment scheme? No one. It’s a pool.
Where a lot of individual investors can all pull their funds into one fund and professional investment advisors and traders. So trade that fund and can I call this just by one word that you have already said?
Can I call this scheme fund an investment fund? Have you heard about investment funds?
What is? What are collective investment schemes? Homes, therefore, because homes.
Funds are not companies. An investment fund is not a company, just a pool of investors and what a phone need, what a phone need.
But the home manager, a company that manages, you will give the money. If you want to prepare a home, who will give you the license in order to start commercializing the home?
Who will give you the license? SCCCCC and what you should sell in order to get the approval from SCC.
One important word, I mean platform. Platform is important for your whole life. Platform is something that should make you think.
Here, talking about phones and the relations with SCC, what is the work? What is the thing you should submit to SCC in order to get the approval of your home?
What is that thing you should serve? You should send.
Have you had all prospectus? The prospectus. First, before creating the form, you should make a document called prospectus. You should send the prospectus to SCC and what you will receive from SCC.
The approval. Once you get your prospectus approved, if you want to invest your money into a home, what can you ask to the manager and what manager should do?
What is being written in the prospectus? What are? What is the prospectus? The rule regarding what is going to happen with your money? Make sense?
Coming back a bank. I buy a banking license. What I can get from people? Buy buy a banking license. What can I get from people?
Depositors. This is a tax depositors.
Deposit. What is the deposit? I give you money. You take this money and you don’t need to tell me what you are going to do with this money.
Is a fund. Is a fund taking a deposit from the public? No, because there is a prospectus. What is being said in the prospectus? What the fund is going to make with?
That one makes sense. So what is the difference between a fan?
And a bank. What is the difference between a fund and a bank? There are tons of difference, but main difference between a fund and a bank, both funds and banks.
Take money from the public, both take money. But in the case of funds, they should have a prospectus where it’s been said what they are going to do with their money. Why? In the case of banks, there are no banks here in the case of banks.
They take the questions. They don’t need to tell you what they are going to do with their money, with your money. Make sense? Any questions?
I said funds are allowed to not lose the money to make bad decisions regarding the money and people can lose money, but at the end you can lose money.
We both, because losing money is something that not depends, yes, on the manager. It also depends on the circumstances. A bank can go into a bankruptcy, a bankruptcy in case a bank goes into a bankruptcy.
Thinking about liquidity, you will lose your money or not.
Again, in the case of states, if a bank goes into a bankruptcy and you have a deposit in a bank, what will happen with your money?
You understand what I’m saying?
This is an important question. You you have your money to a bank, the bank goes into a bankruptcy.
What’s happened with your money?
The money is insurance by the FDIC. Not all the money $250,000 in the case of US.
So you don’t need to. If you have 1,000,000 you will worry for 750.
But if you have 100,000, you will not worry. Your money is being insured, but the bank goes into bankruptcy. Can a bank or can a company goes into a bankruptcy? Yes. Can you lose money? Yes.
At the end, losing money is part of the name of the game, but in order to get a banking license, if you own a bank, you should fulfill lots of regulation. You should fulfill lot of regulation.
A lot Bassel, your central bank regulation and if you fulfill with all regulation, if you don’t fulfill with regulation, you are having you are going into trouble.
But at the end, having said all these things, let me answer back and I’m showing you another different thing. Banking business has to do with stability. Why bonds has to do with return and risk.
So you don’t put your money into a bank because you want to become rich.
You put your money to the bank because you are looking for stability, probably a low return one 1%, 2% because that is inflation. So banking business has to do with. Let me come back so quick, so quick.
Here banking business has to do with the stability. We are in this part and we have moved from this part into this part. Here a phone ask me for money and the phone is telling me.
Before I gave them the money, I am going to invest in Asian markets and I’m going to invest in technological Asian markets. So you can lose a lot of money, but you can win a lot of money in case return on risk. Yep. Or this is a fixed income market. Sorry, a fixed income.
This is a fixed income phone and if it is a fixed income phone, if you wait till maturity.
Yes, credit risk that will be really control it. But careful because if you are looking for your money now and this is a fixed income money, what type of risk you should be aware about?
A interest rate risk. If interest rate changes, you can lose a lot of money and also you can win in case this is fixed income. Make sense.
What is the important word regarding phones prospectus?
Prospectus.
What is prospectus? The regulation regarding the phone?
You can ask for the prospectus, and with the prospectus you can tell all these are the rules and you should fulfill the rules. Sorry.
OK. Capital markets regulation, then European passport. What is the European passport?
Oh, sorry, this you are not from Europe. Let me, I’m going to, I’m not going to ask this in class in the exam. This is not going to be asked. But as we are in Europe, let me just say, let me just say 2 quick words regarding Europe.
Yeah.
We’re going to get up. Sorry. Where is a thumbs up?
Hey.
Regarding, let me say some words regarding Europe, regarding European Union, all of you understand the difference between Europe and European Union, UK, it’s in Europe and it’s not in European Union.
Hey.
Let me continue a little with the case of UK.
UK has their own currency, it is phone and also that you have your own central bank, the Bank of England.
In European Union, not all countries that belong to European Union has Europe. European Union is a monetary union, but not all countries are the same states.
Yes.
Hey, it’s a monetary union, but it’s not a fiscal policy union.
Its country, regarding the European Union, has its own fiscal policy.
And what is this? An absolute disaster. Why? Because there is no connection. There is no connection between monetary policy and fiscal policy.
Is like having one leg that wants to go to one place and the other leg that wants to go to another place, yes.
Also another important thing regarding Europe, that is such European Union, that is something.
So simple, but it’s important, yes to say. Have you been in France? Oh, my.
Your friends and Spanish, both of us belong to European Union and in which language are we communicating?
There is one issue regarding European Union that has to do with let me call it language or let me call it culture.
Also France and Germany has different cultures and also if I move.
Not there than Germany. There are different cultures. There is a big point where are the cultures and you disconnect monetary policy or fiscal policy, European Union, whatever. Once I have said this.
If we want, I’m talking as Europeans and I’m talking, I’m thinking I’m not just.
For example.
The European passport exists. Yes, it’s a fact. What I’m saying now is an opinion, and it’s not just my opinion. There are two guys. One is Ricoletta and another one is Draghi, Mario Draghi.
Each one has written one report. Raki has written one report. Leda has written another report. And what Raki has said in his report, it has been issued one year and a half ago. Raki has said that we should coordinate the Europe Board for fiscal policies and we should invest.
More it depends and we should invest more in, we should regulate. We have too much regulation and we should invest more in technology. It’s what Draghi has said. Aleda, Nicoleta, that’s where your Prime Minister.
Ricoletta that now he is living in Madrid. In his report he has asked for not just a monetary union, but also a financial system union, yes.
Did you see Unicorn? All of you know? Anyone knows what is a Unicorn?
Are you having unicorns? What is a unicorn?
Yes, and we call Isa.
Animal that in the industrial world didn’t used to exist. So it was some. It was something mythological, yes, and a Unicorn is in the digital world. You’re gonna start up.
What you have said is perfect and worth more than 1 billion. What does worth more than 1 billion means? Not someone paying 1 billion. You just said 5% of your company.
5% or 50 million? You understand what I’m saying?
If you just sell a 5% for 50 million, you can work 100 for a billion. Makes sense. How many unicorns are there in Europe among all 50 biggest companies?
How many of them has less than 20 years in Europe? This is all been said in Dravi’s report. We have a problem in Europe regarding productive productiveness and competitiveness and also regarding technology but.
Thanks to Trump. Probably we are waking up. I want to believe.
OK, what is once I have said this, there is a process in Europe. We are looking forward a fine a unit financial system that I’m not going to spend too much time with this loss.
And yes, ACC.
SEC is the supervisor. Yes, when entities are subject to.
OK, this is Spanish regulation. Let me what is this slide about? This slide is about the difference between traders and brokers. You should know what is the difference between a trader and a broker.
What is a sofia de Valores? A trader. What is an agentia de Valores? A broker. What is the difference between a trader and a broker? A trader can buy on his or her behalf while a broker cannot.
A broker can only act as an intermediary between two parties. Make sense?
And fondo de guarantee a reversiones, forget about it. Thanks.
This is the Spanish versus Mercados. This is regarding how the Spanish banking system works, yes.
Then risk and return.
Can we predict the future?
Now that can we manage, yes, regarding banking system, regarding power, regarding Fed is the closer we are to predicting the future if we are talking about fixed income.
All countries.
Pay their debt. What if a country will not pay their debt?
Can a country pay? Can a country go into a bankruptcy? Yes, but what will happen with this country and my class?
If a country goes into a bankruptcy, all things that I’m saying in this class means nothing. You understand what I’m saying. What I’m saying is that all these things that I’m talking about financial system.
Can see theirs.
That there is a risk free asset.
What is the risk? Who is or what is the risk free asset?
Public bonds. So this course consider, not this course, all financial courses considers that governments pay their debt. So regarding uncertainty, regarding uncertainty, there is a framework, this framework.
Please absolutely fix.
And this this framework is valid debt. Then a bank can go. So a bank can go. Can a bank go into a bankruptcy? Yes, but is.
Highly uncertain. A normal company can go into a bankruptcy, yes, but it’s not as uncertain. But a person can go into a bankruptcy. A person, an individual, yes.
You understand what I’m saying. What I’m saying is that can we predict the future?
General terms, no in this course regarding public debt.
Governments always spare the debt and what I’m talking about here with this graph, I’m talking about credit risk. Yes, this is a metaphor. This is a metaphor, but the yield curve.
Is not a metaphor, yes. What is that you could?
Here I’ve got the he’s taking.
Alexandre, who did you call in order to get your grade? How did you call in order to get your grade? SP movies or feeds? Rating against, yes and regarding your grade.
You will get a spread. What this spread is about? How far? How far are you from the framework? Who gives you the framework? The yield curve. Make sense?
So between security and uncertainty, we have risk free asset on one hand and we have stocks on the other.
And regarding the stocks, you can go into a bankruptcy or not. Let me just move and talk. I’m going to jump over this fix income. All of you know what is a bond and let me just recap.
Call to call who? Let me see if there is one example regarding today here. OK, I’m gonna do this, yes.
A bond is issue without discount with maturity of three years, facial of 1000 and three coupons of 100 to be paid yearly. Interest rate is 9%. Calculate price and duration. Yes, all of you should know how to calculate the price of a bond.
How do you calculate the price of a bond at a given yield? How do you calculate the price of a bond at a given yield? By calculating present value. So I have in this case.
100 year 123100 and thousand 100 yes. What is the yield?
9% Yes. How do I calculate present value?
Present value is equal to future value over 1 R rise to P No. Or do I calculate present value by doing 100 / 1 9%?
Let me fix this.
Rise to one, yes.
84 and.
849 If I send this I will get. This is Spanish. Sorry Suma. If I send this I will get.
Present value that how much it should be.
125 One 1025 What if the rate is the yield is 10%? If the rate is 10%, it’s a bond that is paying a coupon of 10% so.
It will be a parable, yes. If interest rates, Marco rise rises. If interest rate rises, what will happen with the price of the if interest rates rises to 11?
The price will drop. On the other hand, if interest rates drops to 9%.
1025 makes sense.
Knowing how to calculate the price of a gun is a must.
It’s a must and not only knowing how to calculate the price of available. What is duration? What is duration? Interest rate sensitivity and I can calculate duration with two different units.
I can calculate duration in years.
And I can calculate duration in rate. I’m going to calculate first duration in years. What is duration? Interest rate sensitivity? How much my price will change when interest rate changes? Let me save this.
Documents.
Today.
I’m worried about how much my price will change when interest rate changes, yes.
How much my price will change when interest rate changes?
So maturity matters. If there were no coupons, I will just focus on maturity and the longer the maturity, but as there are coupons.
Maturity matters. So I’m going to calculate how much of this price belongs to year one, how much of this price belongs to year 2, and how much of this price belongs to year 3?
In order to calculate this, I’m going to calculate the weights this over 1024 and this is.
8% and 82 and I’m going to calculate these times one.
And what I’m calculating here, I’m calculating the weighted average of time. This bond is equivalent.
To a bond with 2.74 years of duration. Careful because I’m saying years, but years is not time in this case. I’m talking about interest rate sensitivity, so.
Let me write here years 2.74 years and let me say that.
If interest rates.
It greases.
This phone.
Will behave same as a 0.
Coupon on with 2.74 years of.
Maturity make sense?
Let me repeat.
What is the duration? 2.74 years. What does this mean? This means that if interest rate changes, if interest rate changes, this bond will behave.
Bond will behave as a zero coupon bond with 2.74 years of.
Good issue.
Of maturity. In practical terms, I am calculating this before buying right before buying this bond and when I if it happened to change.
The interest rate and go up. It is telling me that it’s time to sell at 2.74. No, no, no, no, no, no. Yeah, in practical terms you don’t need to calculate this before.
You calculate this. You calculate duration in order to manage interest rate risk.
You own a bank. You own a bank and you have bonds in your balance sheet.
One, there is something called regarding risk management and banks that is called ALM. What is ALM assets, liquidity assets, liabilities management, yes.
You are going to have you buy bonds and you have your balance sheet and in your balance sheet you have assets and liabilities. Yes. What are your assets, things that will make you?
Get money. What is? What are your liabilities things you should pay for?
So I have incomes and I have outcomes, yes.
Why do we study duration? Because duration of my assets should be the same as duration of my liabilities.
Why? Because if interest rate changes.
If Italy rates goes up, it’s good or bad.
Depending on your position, if you owe money and interest rates go up, you will be happy because you can reinvest at a higher rate. But if you own bonds and interest rates go up, you will be unhappy because.
Price will go down, so interest rates going up or down means really nothing.
What means that depending on the duration of your liabilities and the duration of your assets, you should have same duration in order to have immunized. You should immunized. You should have your balance sheet immunized against interest rate risk.
What does to have your asset in your balance sheet?
What does to have your balance sheet immunized means that no matter what interest rates are going to do, you will not feel change?
Makes sense.
Yes, but I am like I want to own a bank, but I do want to invest in bonds to buy a house for example. And I I don’t see how would we like. I don’t understand what how it will.
Inform my decision calculate this duration has to do with interest rate risk and mostly has to do with bank banking management once I have said this if you.
Have if you have bought a mortgage.
Floating rate or or fixed rate?
If you own a mortgage with floating rate, you will not need to care to. You don’t need to care about duration because the rate is floating. It will change as interest rate changes.
And mortgages are being given at a floating rate in order for banks not to worry about interest rate risk. Do you understand what I mean? If the mortgage is floating rate, you don’t need to worry, but.
If the mortgage is fixed with duration, you will know what will happen in case interest rates changes, because if you have a fixed rate and interest rates goes up, you’re fine.
Financial you should pay more if interest rate you have a fixed rate. Now if you have fixed rate and interest rates goes up regarding your liabilities or your asset, you will have to measure that at the end. What is the point?
The duration of your liabilities to be equal to the duration of your assets. But in this case, what I want you to know is just what is duration. Why? Because duration is something that if you work near banks or if you work near fixed income.
It’s data that you should know and also it’s simple to calculate. It’s just doing the average and you can calculate this. Yes, coming back to this example, here is the price.
Here is present value of first, second and third cash flow 9174. I’m going to give you these numbers.
You have these numbers and then in order to calculate duration you do one times this, two times this, three times this. I’m going to do it this following this times 123.
And I sum all these numbers.
And I calculate. I do this times one, this times two, this times three over the price and I will get.
Duration Yes. What is duration? 2.74 years?
And now continuing with this example, this is my colleague duration or normal duration. This is.
Duration. We have already seen this, but I’m going to repeat. What is macro? What is modified duration modified?
What is modified ratio?
Is calculating this duration that is 10 years.
But in percentage, how do you calculate modified ratio by doing 2.74 / 1 plus?
The year and what does this tells me? Modified this modified duration tells me this is in percentage and.
I mean, I’m going to continue. This is in percentage and this tells me that if interest rates increases in 1%.
Price of the bond.
Within degrees.
Uh 2.74%.
Make sense 2.512. Sorry 2.512.51.
Percent approach, yes. What is modified? What is duration interest rate sensitivity? And we can calculate this in two different ways as in a year basis and in a percentage basis.
What does this tells me about how much the price will change when interest rate changes?
OK, let me continue. Fix income, main risk born decision, interest rate, risk, interest rate, risk management has to do with banking.
Business and who buys lot of bonds? Who buys lot of fixed income? Max so fixed income.
Has to do with banking business, but due to bonds portfolios. Lot of bonds portfolios are being bought by banks because they are looking for stability and thanks to buying bonds, you immunize your portfolios. You have mortgage on one side, you buy bonds on the other.
And thanks to this, you can have immunize your portfolio. If you are an individual, you will not care too much about this.
And you are an individual.
You will not really care too much also about monetary policy.
Just if you own a mortgage or labor changes in the case of US and the amount of money you will pay or not at the end, all of us care about finance.
But this is the name of the game. Also here we will talk about the stock markets, but talking about the stock markets is something that is much more general. I will show you if you are any. OK, let me show if you are an investor.
Store.
You can calculate uncertainty. You can calculate risk. Have you heard about beta?
On one hand you can calculate the expected return of the stock and also you can calculate volatility.
If you own the stocks, what ratio should you calculate? Have you have a sharp sharp ratio, sharp ratio, sharp ratio, sharp ratio is taking expected return over the volatility over the risk?
And the highest start ratio, the better at the end. If you own the stocks, how can you measure? How well or bad are performed? Are this stock performing with start ratio? You take return, you do it over risk.
But talking about the stocks, talking about CAPM is more general. This framework here for example here I have calculated this with decimals and these decimals means means no, sorry, these decimals means because.
When when buying fixed income, you try to reduce risk, Yep.
OK, main risk born in the investors, main types of bonds, bills. What is a 0 coupon bond?
No coupons. A bond without coupons. Bills. Treasury bills. Typically, not typically. Treasury bills are 0 coupon bonds. How can you buy? How can you make money with Treasury bills?
Buying them. How can you make money? You buy it. I was being told today I was told that someone was going to come with us to buy. Have you made to buy from other courses?
Today was the day. They haven’t come yet, so sorry for.
I’ve been told I’m going to wait till. Do you mind to wait till 5 minutes after 12?
OK, bills one year, now some bonds, it’s the same in Spain and then.
I have all already talked about this. You can complicate bonds as much as you as you want you can have.
Do I have to talk about convertible bones?
I I don’t remember, but I will repeat it. What is a convertible bond? A bond that can be transformed into a stock. Depending on how the company is performing, you have invested in bonds. For example, if you are talking about a technological company.
You want to be secure, you want to have something secure and you but you invest in bonds because you want to have a fixed return, but in case the company.
Rocket. I would prefer to have stocks instead of having bonds. Because of that, a company can issue bonds, convertible bonds. Yes, can issue convertible bonds. What is the problem with convertible bonds?
That the more complexity, the more complexity.
They’re less liquid trying to trade a convertible bond in a secondary market. You should give a lot of explanation. What is the price? You should instead of that buying public debt is so quick. Why? Because you just run.
Hey.
I know where the people of the survives are.
Anyone can imagine?
They are in the third floor.
Don’t ask me why, but we have moved. We have changed the room.
And probably they are on the third floor looking for us.
I think so. OK, accrued interest. I’m going to yes, let me just one second and see because at the end I will.
Do you mind if I go one second? Because the problem is that if they don’t make the survive today.
They will call me and call my mother. We have class on Monday. Let’s wait for them on Monday. We are there. We are there.
Hey, I have some of you. I’ll take some of someone. Oh, OK, yes.
Oh, yeah. Well, yeah.
We shouldn’t do that.
Yes, let me.