Intro to Module 1
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Welcome to the first module of Financial Markets.
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In this module, we will dive into two
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important concepts, credit risk
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and financing.
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To understand credit risk, let's consider a
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situation where somebody deposits money
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in a bank.
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A depositor saves money with an institution such
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as a bank or
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a credit union. That's not important.
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However, the depositor expects to
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receive periodic interest
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and ultimately the principal
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back,
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at some future time depending on where and when
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he or she needs the money.
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During the time, the depositor wants to
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ensure that his or
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her funds are safe. Even if the holding institution
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should experience a
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default and lose those funds. This is
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what we refer to as credit risk.
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If we were the bank, the
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bank uses part of the
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depositor money and lends that
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money out to some borrower. The lender expects
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to receive interest and ultimately
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the principal back. So, likewise
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the lender wants to ensure that the borrower is
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good for both the interest and the principle
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and this is again an instance of credit risk. In
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other words, we can say that every time
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someone else owes you
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future payments or principal amounts,
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then we have credit risk.
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When it comes to financing, we all
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understand the basics of
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it. Somebody borrows money
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from someone and financing plays
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an important role in
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our society and economic development.
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There is an even more extreme example when somebody borrows
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to sell short. In
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this case an investor is able to borrow
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a security he or
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she does not have, sell it and he or
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she then hopes that the price goes down before they
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have to to buy it back regardless of
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how the price moves in the future,
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the investor will have to buy back the
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security in return that to the original owner.
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So, the cost of borrowing is
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known as financing. But, from
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the point of view of the original owner,
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he or she
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would like to make sure that the borrower will be
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able to make both the interest payments and
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return the principle. In other words, they don't want them to
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sell their shares around to
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Brazil or to any other country with that
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money.
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Hopefully this all sounds very interesting
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and you'll be eager to dive into
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the required readings and the lesson notes. And don't
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forget to participate in the forums discussion
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and attend the live session. Let's begin!
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Bye.
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