1w FinEcon 2024fall v1
Summary
TLDRProfessor Caleb Kim introduces the course on Financial Economics, covering financial transactions and products. He shares his background, including his education at Korea University and a PhD from HUK University, focusing on market instruments like OIS and IRS. With experience as Chief Risk Officer at Numa Korea, he discusses his expertise in financial risk management, particularly in the OTC derivatives industry. The course will explore financial instruments, derivatives, and risk management, aiming to provide a comprehensive understanding of financial markets.
Takeaways
- 📚 The course focuses on Financial Economics, covering financial transactions and products.
- 👨🏫 The instructor, Caleb Kim, has a background in financial engineering and has worked extensively in financial risk management.
- 🎓 Caleb Kim's educational journey includes a Bachelor's from Korea University, a Master's in financial engineering, and a PhD from HUK University of Foreign Studies.
- 🏢 He has professional experience at NH Investment Securities and Numa Korea, where he was the Chief Risk Officer.
- 💼 Caleb Kim's expertise lies in managing market risk, credit risk, regulatory risk, and operational risk in the OTC derivatives industry.
- 📈 He was part of a working group that established the KRW risk-free rate, which is a significant development in the Korean financial market.
- 🌐 The course will explore financial instruments like futures, options, and swaps, and their role in risk management and market operations.
- 📖 Recommended reading includes 'Fundamentals of Futures and Options Markets' by John C. Hull, available in both English and Korean.
- 💡 The course aims to provide insights into financial instrument dynamics, price setting, and effective financial risk management.
- 🌟 The concept of financial economics is illustrated through the life cycle consumption and income graph, highlighting the need for financial tools to balance income and consumption over time.
Q & A
What is the name of the instructor mentioned in the script?
-The name of the instructor is Caleb Kim, but he prefers to be called HKB.
What is the instructor's area of expertise?
-The instructor's area of expertise is Financial Risk Management, particularly in the OTC derivative industry.
What does OTC stand for in the context of the script?
-OTC stands for Over-The-Counter, which refers to financial products traded outside of exchange markets.
What is the role of CSA in OTC derivative trading?
-CSA stands for Credit Support Annex, which is a self-contained contract that forms part of the ISDA Master Agreement. It explains what collaterals can be used and how to post and take them back, including the costs involved.
What is the significance of the KW risk-free rate mentioned in the script?
-The KW risk-free rate is a rate that is nearly risk-free, with a default probability close to zero. It is used as a reference rate in financial markets and was established by a working group that the instructor was a part of.
What was the instructor's contribution to the establishment of the KW risk-free rate?
-The instructor was part of the working group that discussed and decided on the KW risk-free rate, engaging in discussions with the Bank of Korea (BOK), the Financial Supervisory Service (FSS), and the Korean Exchange (KRX).
What is the difference between a traditional interest rate swap and an overnight index swap?
-In a traditional interest rate swap, one party pays a fixed rate and receives a floating rate like LIBOR. In an overnight index swap, the floating rate is based on an overnight rate index, such as SOFR or SONIA, which reflects the cost of borrowing overnight.
What is the purpose of the course on Financial Economics mentioned in the script?
-The purpose of the course is to study various financial instruments and markets, focusing on how they work together, how prices are set, and how to manage financial risks effectively.
What are the key areas covered in the lecture plan for the Financial Economics course?
-The key areas covered include introduction to financial derivatives, future and forward contracts, option pricing models, option trading strategies, and swap and risk management.
What is the recommended textbook for the course, and is there a Korean version available?
-The recommended textbook is 'Fundamentals of Futures and Options Markets' by John C. Hull. Yes, there is a Korean version available for those who prefer to read in Korean.
How does the instructor plan to make the course material accessible to students who might not be familiar with financial jargon?
-The instructor plans to present the material in a simple, concise, and easy-to-understand manner, focusing on key concepts from each topic to help students grasp the essentials and manage their financial wealth and career.
Outlines
🎓 Introduction to Financial Economics and Instructor's Background
The speaker, Caleb Kim, introduces the topic of Financial Economics for the semester, focusing on financial transactions and products. He provides his contact information and shares his educational background, including degrees from Korea University and a PhD from HUK University. Caleb's professional experience includes working in financial risk management at NH Investment Securities and as Chief Risk Officer at Numa Korea, where he managed various types of risks. He also discusses his involvement in establishing the KRW risk-free rate in South Korea.
📈 Understanding OTC Derivatives and Credit Support Annex
Caleb explains the concept of Over-The-Counter (OTC) derivatives, contrasting them with exchange-traded derivatives. He discusses the Credit Support Annex (CSA), which is part of the ISDA Master Agreement used in OTC derivative trades to manage credit risk. He also mentions his role in the establishment of the KRW risk-free rate by the Bank of Korea and the shift from term rates to overnight rates following the 2008 financial crisis.
🌐 The Evolution of Risk-Free Rates and the Impact of the Financial Crisis
The paragraph delves into the history of risk-free rates, highlighting the 2008 financial crisis's impact on the perception of swap banks' risk profiles. It discusses the global shift from term rates to overnight rates as risk-free benchmarks, with a focus on the establishment of the KRW risk-free rate in Korea. Caleb's involvement in the working group that discussed the creation of this rate is also highlighted.
📚 Course Overview and Financial Instruments
Caleb outlines the course structure, emphasizing the study of financial instruments and markets. He mentions that the course will cover basic derivative products like futures, options, and swaps, and will teach how to set prices and manage risks. The course aims to provide insights into financial markets' dynamics and operations, with a focus on practical application.
💼 Financial Risk Management and Recommended Reading
The speaker discusses the importance of financial risk management and the key areas the course will cover, including future and option markets. He recommends the book 'Fundamentals of Futures and Options Markets' by John C. Hull, suggesting both English and Korean versions for students. Caleb emphasizes the relevance of understanding financial economics concepts for managing personal financial wealth and career development.
🌱 Life Cycle Consumption and Income Management
Caleb introduces the concept of life cycle consumption and income, explaining how individuals' income and consumption patterns can vary throughout their lives. He discusses the challenges of managing the gap between income and consumption and the strategies people use to smooth out their consumption streams, such as borrowing or investing. The paragraph aims to illustrate the practical applications of financial economics in personal financial planning.
Mindmap
Keywords
💡Financial economics
💡Financial products
💡Financial Risk Management
💡OTC (Over-The-Counter) derivatives
💡CSA (Credit Support Annex)
💡Risk-free rate
💡Interest Rate Swap (IRS)
💡NH Investment Securities
💡KRW risk-free rate
💡Yield Curve
💡Life cycle consumption and income
Highlights
Introduction to Financial Economics and the course's focus on financial transactions and products.
Instructor Caleb Kim's background, including his education and experience in financial risk management.
Caleb's preference for being called 'Kop' and his contact information for student inquiries.
Caleb's academic journey, with degrees from Korea University, K, and a PhD from HUK University of Foreign Study.
His specialization in OTC derivative industry and experience as Chief Risk Officer at Numa Korea.
Involvement in establishing the KRW risk-free rate and working with the Bank of Korea.
Explanation of the difference between exchange and OTC markets in the context of financial derivatives.
Discussion on the 2008 Global Financial Crisis and its impact on the perception of risk-free rates.
Introduction to the concept of overnight index swaps (OIS) and their role in financial markets.
Caleb's receipt of an outstanding paper award through the KX academic support program.
Course overview, including the study of financial instruments, markets, and their interactions.
Objectives of the course: to introduce basic concepts of future, option, and swap markets.
Outline of the course content, covering financial derivatives, pricing models, and risk management.
Recommendation of the book 'Fundamentals of Futures and Options Markets' by John C. Hull.
Discussion on the concept of financial economics and its application to life cycle consumption and income.
Importance of managing the gap between income and consumption for financial stability.
The goal of smoothing lifetime consumption to match income generation for optimal financial planning.
Transcripts
hello you guys um the topic uh we are
going to cover is uh Financial economics
for this semester today uh in know the
first week so we go through
orientation and I will uh you know give
you a taste of financial uh
transaction uh including uh various
Financial
products
yeah firstly uh let me give you uh you
know some introduction of
myself um my name is Caleb Caleb uh Kim
so you just call me H KB and Korean name
is uh
Kimu uh lat you know if you are familiar
with the Korean and please uh call me in
a techim so either way uh is okay but I
prefer to be called kop than Korean
name email ID uh hello risk and hand
mail net please uh you know remember
this one and my my mobile is like this
so during uh your studying uh you know
if you have any question or query please
send me uh to my uh email or mobile so
when I uh get it I will uh try to uh
respond you uh as soon as
possible education that what I got from
uh
1982 to
1988 I went to uh Korea University I
studied uh economy so I got Bachelor
degrees from uh Korea University long
ago from Mar from March 1997 to February
1998 I um I I went to uh K which is one
of one of uh graded uh School in uh
Korea I from uh from
K I got a master degrees in financial
engineering from uh 2014 to
2020 I got a PhD in huk University of
Foreign uh study so where I studied I
focused on some Market including uh you
know
ois and uh
IRS IRS stands for interest rate
Swap and the pricing uh of calized swap
transaction
Etc where I worked
for uh since since 2001
to6 I worked at one of local security
houses which is NH investment
Securities my major uh job
was uh regarding uh Financial Risk
Management
uh from 2006 to
2023 I worked at Numa Korea for 17
years I was I had been uh Chief risk
officer to uh govern and the risk manage
Market risk and credit risk and what
else regulatory risk and even
operational uh
risk those are my area uh I covered as a
chief risk officer in financial fund
since uh
2006 okay uh my
highlight uh dedicated to Financial Risk
Management within OTC derivative
industry maybe you're not familiar with
the OTC this stands
for over
the
counter what is reverse what is the
opposite uh concept uh against
OTC
Exchange
exchange means like uh you know you can
see uh you know KX in Korea that is uh
you know Exchange
Market over the counter derivative
means
OTC derivatives product are traded
outside of outside of
exchange so this is called OTC dtive
industry through uh through my uh you
know whole uh
life um I uh you know I covered
Financial Risk Management Area
especially uh in uh OTC dtive
industry okay uh specialized in the
pricing of calized OTC Dy product based
on uh CSA CS say maybe not familiar as
well says say stands
for say say stands
for
credit
support
anx when you trade uh OTC T tips with
the the the uh
counterparty basically you need to
assign
EA
Master agreement this is Regal
agreement by the way uh you know some
terminology uh you're not familiar with
then uh you can uh you know ask me or
you if you uh you know if you uh you
know answer uh your question into uh
chat GPT and this one uh friendly and
kindly gives you back uh answer so I
think uh uh it's a lot helpful you can
you need to you you you
maximize uh in a chat GPT so either way
uh um credit support Annex is
s self
contract of
Isa Master
agreement this CSA um this
sessay explains what uh what could be uh
collaterals and how to uh you know how
to uh give it how to post and uh take it
back what is cost of uh you know C Etc
so this uh uh this is what this is about
and I involved in establishing KRW risk
free rate read by a b working group b is
Bank of Korea this is Central Bank in
Korea here you know you see the KW risk
free rate risk free rate means what risk
free risk free means no risk or uh
nearly nearly
uh nearly close to zero
risk in uh in other
words
risk free
means
default of
probability oh sorry uh let me uh
change default
probability is close to uh zero so no
default probability so that's the
definition of for risk
free in the market then you may see uh
you know a risk free rate in uh
USA so
far you can enter this uh you know so
far into CH B and it can give
you a lot of wonderful answer uh back to
you
h
and
Sonia yeah those are part of uh you know
risk free rates risk uh reference free
rates before uh
2 8 you know 2008 you know do you know
what happened there led by uh led by
subprime U mortgage instant from USA and
2008 the Global Financial uh crisis
broke out so during uh you know this uh
uh Global financial crisis most of swap
bank they are you know they were under
of funding uh shortage so some uh
Financial form such as reman
brothers uh they uh went on bankrupt so
during that period people uh
understood swap Bankers are not uh risk
free they are they will uh potentially
exposed to uh default risk so since that
time people uh you know are reluctant
people were reluctant to use so-called
Rial
or
uo these are tomate three
months tomate they not they were not
willing to use it because these are
these
were these were uh uh these were
recognized by market
participant uh it's not it was not risk
free so so major uh major uh countries
and
major uh regulatory bodies they are
determined to remove they determin to
reform uh in a benchmark rate from term
rat
to uh one day overnight rate one
day
overnight
rate so when when you know when it comes
to uh risk free rate these days then you
know you can think about uh sofa and
Tona and Sonia such as overnight rate so
overnight rate means you rent some money
to your friend overnight then probably
you know your your friend still uh is
not strong from a financial perspective
but you may uh you know discount while
uh
his uh default probability would be
would be uh close to zero that would be
possible so w rate uh you know
recognized by market participant these
are risk free or these are
you know these uh don't
have credit risk at all so in Korea in
Korea up until uh
20 101 I believe uh there we uh didn't
have KW risk free rate that's why B set
up a working group and invited Mar
participant from Financial forms
including Banks and security houses uh
you know the group talked about how to
uh you know establish KW risk free rate
I was a part of those uh working group
and uh you know discussed how to uh
which uh you know how to uh uh
decide KW risk free rate
Etc after that engage in discussion with
uh FSS FSS is uh local regulator in
Korea and B I already mentioned and the
KX this is Exchange Market in Korea uh
on the on the topic of KRW Ys Market Ys
Market means what Ys Market
means
overnight
index
swap yeah over index
swap to um uh before uh in know
introduction of Ys uh let me uh go to
rival first so rivos means
what Rios means
let me
erase rival swap means let's say uh
interest
rate so so
now you and this is
Bank typical uh interest swap uh you
enter is like this
you pay uh fixed coupon such
as
uh 10 year swap you pay a fixed
coupon
5% and instead you
receive what Lial such
as
this
is floating
rate floate
means uh from uh today maybe three
months rate already fixed but uh 3
months after 3 months 3 months after 9
months 3 months after one year you know
that's not that's not decided so you're
not uh uh it's a
uncertain rival goes up or goes down
that would be
possible that this is one of a typical
example of interest rate swap however
overnight index
swap is uh looks like a very uh you know
similar but different one
is yeah
Bank y you pay fixed
coupon however you
receive you
receive s far
Ora so far TOA this case these are
index of course uh you know how to uh
how to uh this side floating rate coupon
you know relatively uh not simple but uh
this is basic concept for overnight
index swap so in in Korea uh we uh we
don't have uh KW W Market so uh now we
need to set up kwi Market based on what
of
far
this is uh KW risk reference rate in
Korea final one I received outstanding
uh paperwor through kis KX academic
support program
in 20 20
okay yeah lecture plan for this semester
course overview this course
incompasses the study of various
financial instruments and market and
their interaction so you will focus on
how financial instruments work together
and learning about basic WC derivative
products like future and option and
swap uh if you uh never heard uh about
uh you know future and option and swap
well don't worry about it I will try to
uh you know I will try to lead you as
easy as possible so don't worry about I
just take it uh simple and concise and
easy for you through this course you
will uncover how prices are set how
risks are managed and how Financial
Market operate in
practice and cuse objectives to
introduce a basic concept basic of
future and option and swap Market to
gain insight into various Financial
instrument and the market Dynamic uh to
understand how prices are set and how to
manage Financial Risk effectively well
you know uh it's not really like uh
touching uh you know your mind but uh uh
going through going through uh each uh
you know topic by week uh you not you
are uh growing uh to understand uh what
these are okay re of contents uh
introduction to financial derivatives
and future and forward option option
pricing models option trading strategy
Swap and risk management the ma main uh
key areas uh we are going to cover
through this uh in our lecture all
right next B uh left hand side uh
fundamentals of uh future and option
Market by uh John H John H is of one of
famous uh figure in the financial
Industries this is excellent book if you
uh you know like to read uh Korean then
we have you know Korean version at the
same time so either uh you know English
version or Korean version please uh buy
one uh one uh copy and uh read it
through uh day by day uh this is very
excellent and then you more if you are
you know not well ready to uh understand
whole but don't worry about it you just
take some key uh concept uh from uh each
topic that would be uh really helpful uh
for you to uh manage your financial
wealth and your career I
think yeah you know this uh semester uh
with you the topic we are going to cover
a
financial economics where probably you
may heard economics but what is
financial economics what's the concept
of this uh you know
topic let me give you one example yeah
life cycle consumption and income uh
graph here this one
is income uh graph
well this is one example but the you
income not always matchy uh you know
this uh
graph the other
one consumption uh graph this
one a
consumption
graph all
right let's see this part
there is a gap between uh consumption uh
and income which means you need you need
more money to uh you
know to to support your
consumption but your income is less than
uh less than your consumption so there
is a
gap then what what what are you going to
do to fix this Gap probably you need
more money but uh you income is limited
then uh you can borrow some money from
your friend your
family from yeah from Like A
banks that should be happening
otherwise you can't uh
survive look at this
area your income rather than your
consumption which means you have Surplus
so what you're going to
do
definitely you need to invest for future
consumption and this part
again your consumption is bigger than
your income this is another homework you
need to sort
out
okay these are this is life cycle
pattern of income
generation and consumption
spending however your income generation
and consumption spending are not
identical are not the same uh that's
where you home is arising so typically
you have you have General preference for
what smooth lifetime consumption stream
which means which means if you make your
income generation just like a
consumption graph then that would be uh
really perfect you don't worry about uh
you know you don't worry about gap
between consumption and income anymore
because
because uh let me
erase yeah because you like
to you like to make this
consumption through your whole
life so at the same time your income is
just like this then there is no Gap that
this is the goal we targeting so what
you're going to do for reducing
Gap
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