American Management and Business Administration Institute
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Study Guide	This is a Study Guide. As the name implies, it guides the student in the reading of the textbook, The Virtual MBA. The textbook is divided into 12 Chapters and each chapter into several Sections. Sections are numbered consecutively from the beginning to the end of the textbook. We will refer you to the textbook by citing the Section number. This Subject is based on Chapter 9 of the textbook.
What is Finance?	Finance is the process of raising and investing money, creating value in the process. Thus the simplistic popular advice: buy low, sell high. Now please read Section 97. of the textbook and return to this point of the Guide. Please continue.
Capital Markets. The Financial System	Capital Markets are formed by the transactions of Issuers, Intermediaries and Investors of "securities" (financial instruments). Now please read Sections 98. and 99. of the textbook and return to this point of the Guide. Please answer the questions
Self- evaluation questions	Question 1 Which is the role of brokers in capital markets? See Model Answer A1
	Question 2 Which is the name given to the aggregate of operations in the capital market? See Model Answer A2
Financial Instruments. Bank deposits	The textbook explains the difference between the two basic types of financial instruments and mentions different kinds of Bank Deposits. Now please read Sections 100. and 101. of the textbook and return to this point of the Guide. Please answer the questions.
Self- evaluation questions	Question 3 Which is the name given to instruments not representing actual ownership of concrete assets? See Model Answer A3
	Question 4 Which of these two instruments is a derivative: shares; stock index options? See Model Answer A4
Fixed Amount Obligations	Bonds of different types, Treasury Notes and Bills (in the US, but equivalents in most other countries are issued), commercial paper, bankers acceptances. All these are fixed amount obligations. The textbook describes them. Now please read Section 102. of the textbook and return to this point of the Guide. Please answer the questions.
Self- evaluation questions	Question 5 The ABC corporation issued a 10-year bond. The bearer has the right to exchange the bond for a fixed quantity of ABC shares from year 5 to 10 of the bond's life. What type of bond is this? See Model Answer A5
	Question 6 The DEF corporation issued a 10-year bond at 9% fixed interest. From year 5 to 10 of the bond's life, DEF may rescue the bond and pay back the outstanding principal. What type of bond is this? See Model Answer A6
The holder of these instruments owns a share in the business	The "shareholders" in a company own a piece of the business. The text describes the two basic types of stock: common and preferred. You will also read about IPO's. Now please read Section 103. of the textbook and return to this point of the Guide. Please answer the questions.
Self- evaluation questions	Question 7 You have a good business idea and you establish a company to implement it. You keep 50% of the stock and sell the rest to 5 friends. What type of company is this? See Model Answer A7
	Question 8 You own stock from ABC Co. entitling you to a yearly 8% fixed dividend. What type of shares are these? See Model Answer A8
Derivatives	Options are rights (not obligations) to take actions. Example: a contract that gives you the right to purchase shares at a certain price. Of course, you will exercise this option only if and when the price of the shares in the market is higher than the option price. But keep in mind that someone else has sold this option to you; the seller of an option has the obligation to make good on it. Now please read Section 104. of the textbook and return to this point of the Guide. Please answer the questions.
Self- evaluation questions	Question 9 You paid $100 for an option to buy 10 ABC shares at $50 each 3 months from today. If on expiration date the shares are worth only $40, how much did you lose? See Model Answer A9
	Question 10 You received $500 for the sale of a put option giving the bearer the right to sell to you 100 shares of DEF at $50 each. At expiration the stock's price is $40. Do you win or lose, and how much? See Model Answer A10
Hedging. Financial Institutions. The Global Capital Market	Hedging is a practice geared to protect investments from certain risks. You may consider it a type of insurance. Speculation is betting; you may consider it a type of gambling. Now please read Sections 105. to 107. of the textbook and return to this point of the Guide. Please answer the questions.
Self- evaluation questions	Question 11 You are importing cars from Japan and the amount of ¥10 million is payable in 3 months. What could you do to protect yourself from an increase in the price of the yen? See Model Answer A11
	Question 12 I just bought shares of the Spanish company Telefonica in the New York Stock Exchange. What type of instrument makes this possible? See Model Answer A12
Here we say: So long!	This is the End of the Study Guide for the Subject Finance. The Subject belongs to the .Curriculum of the free Certificate Program in Management and Business Administration offered by AMBAI as a Public Service.
To access all subjects and the Final Test of this Management and Business Administration Program click here.
A2 - The financial system. Back
A1 - Intermediaries between sellers and buyers of financial instruments. Back
A4 - Stock index options. Back
A3 - Derivatives. Back
A6 - A callable bond. Back
A5 - A convertible bond. Back
A8 - Preferred shares. Back
A7 - A privately held corporation. Back
A10 - You are obliged to pay the difference between the stock's actual price ($40) and the option price ($50). For 100 shares, this amounts to $10 times 100 =$1000. Since you received $500 for the sale of the put option, your net loss is $500.. Back
A9 - The $100 you paid for the option. You bought a right, not an obligation. Back
A11 - Buy an option to purchase yen in 3 months at a fixed price. Back
A12 - The ADR, American Depositary Receipt. Back

( * ) About this course. AMBAI is a non-profit "Virtual Teaching Institution", whose faculty members are located in different countries and interact among them and with students via the Web; they are executives of multinational corporations who donate their time and effort for this public service program. AMBAI has not applied for nor received accreditation from any private or public institution. The only objective of this free Program is to improve the skills of the students; no claim is made about the usefulness of the Certificate of Completion. The Cambridge, MA address is a postal address only, not the physical location of AMBAI.