Finance

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Finance

ContentsArticles

Introduction 1

Main article 2

Finance 2

The main techniques and sectors of the financial industry 11

Financial services 11

Personal finance 15

Personal finance 15

Corporate finance 18

Corporate finance 18Financial capital 25Cornering the market 30Insurance 32

Risk Management 51

Derivative 51

Finance of states 60

Public finance 60

Financial economics 68

Financial economics 68

Financial mathematics 71

Financial mathematics 71

Experimental finance 75

Experimental finance 75

Behavioral finance 76

Behavioral finance 76

Intangible asset finance 85

Intangible asset finance 85

ReferencesArticle Sources and Contributors 88Image Sources, Licenses and Contributors 90

Article LicensesLicense 91

Introduction 1

IntroductionNote. This book is based on the Wikipedia article, "Finance." The supporting articles are those referenced as majorexpansions of selected sections.

2

Main article

FinanceFinance is the science of funds management.[1] The general areas of finance are business finance, personal finance,and public finance.[2] Finance includes saving money and often includes lending money. The field of finance dealswith the concepts of time, money, and risk and how they are interrelated. It also deals with how money is spent andbudgeted.One aspect of finance is through individuals and business organizations, which deposit money in a bank. The bankthen lends the money out to other individuals or corporations for consumption or investment, and charges interest onthe loans.Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank ordirectly from a corporation. Bonds are debt instruments sold to investors for organizations such as companies,governments or charities.[3] The investor can then hold the debt and collect the interest or sell the debt on asecondary market. Banks are the main facilitators of funding through the provision of credit, although private equity,mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt.Financial assets, known as investments, are financially managed with careful attention to financial risk managementto control financial risk. Financial instruments allow many forms of securitized assets to be traded on securitiesexchanges such as stock exchanges, including debt such as bonds as well as equity in publicly traded corporations.Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the UnitedKingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences onmonetary and credit conditions in the economy.[4]

The main techniques and sectors of the financial industryAn entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entitywhose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing itsexpenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buynotes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lenderreceives, and the financial intermediary pockets the difference.A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which itpays interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes,to coordinate their activity. Banks are thus compensators of money flows in space.A specific example of corporate finance is the sale of stock by a company to institutional investors like investmentbanks, who may sell it on to private investors, or other financial institutions such as pension funds. The stock givepart ownership in that company in proportion to shares owned.In return for the stock, the company receives cash, which it may use to expand its business; ("equity financing"), toreduce its debt.[5] Equity financing mixed with the sale of bonds (or any other debt financing) is called the company'scapital structure.Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporatefinance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, thegoals of each of the above activities are achieved through the use of appropriate financial instruments andmethodologies, with consideration to their institutional setting.

Finance 3

Finance is one of the most important aspects of business management. Without proper financial planning a newenterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both forthe individual and an organization.

Personal financeQuestions in personal finance revolve around• How much money will be needed by an individual (or by a family), and when?• Where will this money come from, and how?• How can people protect themselves against unforeseen personal events, as well as those in the external economy?• How can family assets best be transferred across generations (bequests and inheritance)?• How does tax policy (tax subsidies or penalties) affect personal financial decisions?• How does credit affect an individual's financial standing?• How can one plan for a secure financial future in an environment of economic instability?Personal financial decisions may involve paying for education, financing durable goods such as real estate and cars,buying insurance, e.g. health and property insurance, investing and saving for retirement.Personal financial decisions may also involve paying for a loan, or debt obligations.

Corporate financeManagerial or corporate finance is the task of providing the funds for a corporation's activities. For small business,this is referred to as SME finance (Small and Medium Enterprises). It generally involves balancing risk andprofitability, while attempting to maximize an entity's wealth and the value of its stock.Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balancebetween these elements forms the company's capital structure. Short-term funding or working capital is mostlyprovided by banks extending a line of credit.Another business decision concerning finance is investment, or fund management. An investment is an acquisition ofan asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio –one has to decide what, how much and when to invest. To do this, a company must:• Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax

considerations;• Identify the appropriate strategy: active v. passive – hedging strategy• Measure the portfolio performanceFinancial management is duplicate with the financial function of the Accounting profession. However, financialaccounting is more concerned with the reporting of historical financial information, while the financial decision isdirected toward the future of the firm.

CapitalCapital, in the financial sense, is the money that gives the business the power to buy goods to be used in theproduction of other goods or the offering of a service.

The desirability of budgetingBudget is a document which documents the plan of the business. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is

Finance 4

drawn to control and operate in that particular year.

Capital budget

This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets areoften adjusted annually and should be part of a longer-term Capital Improvements Plan.

Cash budget

Working capital requirements of a business should be monitored at all times to ensure that there are sufficient fundsavailable to meet short-term expenses.The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget hasthe following six main sections:1. Beginning Cash Balance - contains the last period's closing cash balance.2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)3. Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term

loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list(e.g. depreciation, amortization, etc.)

4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by thetotal cash disbursements plus the minimum cash balance required by company policy. If total cash available isless than cash needs, a deficiency exists.

5. Financing - discloses the planned borrowings and repayments, including interest.6. Ending Cash balance - simply reveals the planned ending cash balance.

Management of current assets

Credit policy

Credit gives the consumer the opportunity to buy, purchase or acquire goods and services, and pay for them at a laterdate. This has its advantages and disadvantages as follows:

Advantages of credit trade

• Usually results in more customers than cash trade.• Can charge more for goods to cover the risk of bad debt.• Gain goodwill and loyalty of customers.• People can buy goods and pay for them at a later date.• Farmers can buy seeds and implements, and pay for them only after the harvest.• Stimulates agricultural and industrial production and commerce.• Can be used as a promotional tool.• Increase the sales.• Modest rates to be filled.• can be a marketing tool

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Disadvantages of credit trade

• Risk of bad debt.• High administration expenses.• People can buy more than they can afford.• More working capital needed.• Risk of Bankruptcy.• May lose peace of mind.

Forms of credit

• Suppliers credit:• Credit on ordinary open account• Installment sales• Bills of exchange• Credit cards• Contractor's credit• Factoring of debtors• Cash credit• Cpf credits• Exchange of product

Factors which influence credit conditions

• Nature of the business's activities• Financial position• Product durability• Length of production process• Competition and competitors' credit conditions• Country's economic position• Conditions at financial institutions• Discount for early payment• Debtor's type of business and financial position

Credit collection

Overdue accounts

• Attach a notice of overdue account to statement.• Send a letter asking for settlement of debt.• Send a second or third letter if first is ineffectual.• Threaten legal action.

Effective credit control

• Increases sales• Reduces bad debts• Increases profits• Builds customer loyalty• Builds confidence of financial industry• Increase company capitalisation• Increase the customer relationship

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Sources of information on creditworthiness

• Business references• Bank references• Credit agencies• Chambers of commerce• Employers• Credit application forms

Duties of the credit department

• Legal action• Taking necessary steps to ensure settlement of account• Knowing the credit policy and procedures for credit control• Setting credit limits• Ensuring that statements of account are sent out• Ensuring that thorough checks are carried out on credit customers• Keeping records of all amounts owing• Ensuring that debts are settled promptly• Timely reporting to the upper level of management for better management.

Stock

Purpose of stock control• Ensures that enough stock is on hand to satisfy demand.• Protects and monitors theft.• Safeguards against having to stockpile.• Allows for control over selling and cost price.StockpilingThis refers to the purchase of stock at the right time, at the right price and in the right quantities.There are several advantages to the stockpiling, the following are some of the examples:• Losses due to price fluctuations and stock loss kept to a minimum• Ensures that goods reach customers timeously; better service• Saves space and storage cost• Investment of working capital kept to minimum• No loss in production due to delaysThere are several disadvantages to the stockpiling, the following are some of the examples:• Obsolescence• Danger of fire and theft• Initial working capital investment is very large• Losses due to price fluctuationRate of stock turnoverThis refers to the number of times per year that the average level of stock is sold. It may be worked out by dividingthe cost price of goods sold by the cost price of the average stock level.Determining optimum stock levels• Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.• Minimum stock level refers to the point below which the stock level may not go.• Standard order refers to the amount of stock generally ordered.

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• Order level refers to the stock level which calls for an order to be made.

Cash

Reasons for keeping cash

• Cash is usually referred to as the "king" in finance, as it is the most liquid asset.• The transaction motive refers to the money kept available to pay expenses.• The precautionary motive refers to the money kept aside for unforeseen expenses.• The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

Advantages of sufficient cash

• Current liabilities may be catered for meeting the current obligations of the company• Cash discounts are given for cash payments.• Production is kept moving• Surplus cash may be invested on a short-term basis.• The business is able to pay its accounts in a timely manner, allowing for easily obtained credit.• Liquidity• Quick upfront payments.

Management of fixed assets

Depreciation

Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It iscalculated yearly to enforce the matching principle.

Insurance

Insurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certaineventuality.Uninsured risks• Bad debt• Changes in fashion• Time lapses between ordering and delivery• New machinery or technology• Different prices at different placesRequirements of an insurance contract• Insurable interest

• The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed orlost.

• The item must belong to the insured.• One person may take out insurance on the life of another if the second party owes the first money.• Must be some person or item which can, legally, be insured.• The insured must have a legal claim to that which he is insuring.

• Good faith• Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the

insured.

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Shared ServicesThere is currently a move towards converging and consolidating Finance provisions into shared services within anorganization. Rather than an organization having a number of separate Finance departments performing the sametasks from different locations a more centralized version can be created.

Finance of statesCountry, state, county, city or municipality finance is called public finance. It is concerned with• Identification of required expenditure of a public sector entity• Source(s) of that entity's revenue• The budgeting process• Debt issuance (municipal bonds) for public works projects

Financial economicsFinancial economics is the branch of economics studying the interrelation of financial variables, such as prices,interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates oninfluences of real economic variables on financial ones, in contrast to pure finance.It studies:• Valuation - Determination of the fair value of an asset

• How risky is the asset? (identification of the asset-appropriate discount rate)• What cash flows will it produce? (discounting of relevant cash flows)• How does the market price compare to similar assets? (relative valuation)• Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)

• Financial markets and instruments• Commodities - topics• Stocks - topics• Bonds - topics• Money market instruments- topics• Derivatives - topics

• Financial institutions and regulationFinancial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise therelationships.

Financial mathematicsFinancial mathematics is a main branch of applied mathematics concerned with the financial markets. Financialmathematics is the study of financial data with the tools of mathematics, mainly statistics. Such data can bemovements of securities—stocks and bonds etc.—and their relations. Another large subfield is insurancemathematics. This is also known as quantitative finance, practitioners as Quantitative analysts.

Experimental financeExperimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes. Researchers in experimental finance can study to what extent existing financial economics theory makes valid predictions, and attempt to

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discover new principles on which such theory can be extended. Research may proceed by conducting tradingsimulations or by establishing and studying the behaviour of people in artificial competitive market-like settings.

Behavioral financeBehavioral Finance studies how the psychology of investors or managers affects financial decisions and markets.Behavioral finance has grown over the last few decades to become central to finance.Behavioral finance includes such topics as:1. Empirical studies that demonstrate significant deviations from classical theories.2. Models of how psychology affects trading and prices3. Forecasting based on these methods.4. Studies of experimental asset markets and use of models to forecast experiments.A strand of behavioral finance has been dubbed Quantitative Behavioral Finance, which uses mathematical andstatistical methodology to understand behavioral biases in conjunction with valuation. Some of this endeavor hasbeen led by Gunduz Caginalp (Professor of Mathematics and Editor of Journal of Behavioral Finance during2001-2004) and collaborators including Vernon Smith (2002 Nobel Laureate in Economics), David Porter, DonBalenovich, Vladimira Ilieva, Ahmet Duran). Studies by Jeff Madura, Ray Sturm and others have demonstratedsignificant behavioral effects in stocks and exchange traded funds. Among other topics, quantitative behavioralfinance studies behavioral effects together with the non-classical assumption of the finiteness of assets.

Intangible Asset FinanceIntangible asset finance is the area of finance that deals with intangible assets such as patents, trademarks, goodwill,reputation, etc.

Related professional qualificationsThere are several related professional qualifications in finance, that can lead to the field:• Accountancy:

• Qualified accountant: Chartered Accountant (ACA - UK certification / CA - certification in Commonwealthcountries), Chartered Certified Accountant (ACCA, UK certification), Certified Public Accountant (CPA, UScertification)

• Non-statutory qualifications: Chartered Cost Accountant CCA Designation from AAFM• Business qualifications: Master of Business Administration (MBA), Bachelor of Business Management (BBM),

Master of Commerce (M.Comm), Master of Science in Management (MSM), Doctor of Business Administration(DBA)

• Generalist Finance qualifications:

• Degrees: Masters degree in Finance (MSF), Master of Financial Economics, Master of Finance & Control(MFC), Master Financial Manager (MFM), Master of Financial Administration (MFA)

• Certifications: Chartered Financial Analyst (CFA), Certified International Investment Analyst (CIIA),Association of Corporate Treasurers (ACT), Certified Market Analyst (CMA/FAD) Dual Designation,Corporate Finance Qualification (CF)

• Quantitative Finance qualifications: Master of Science in Financial Engineering (MSFE), Master ofQuantitative Finance (MQF), Master of Computational Finance (MCF), Master of Financial Mathematics (MFM),Certificate in Quantitative Finance (CQF).

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See also• Financial crisis of 2007–2010• Local Government Finance in Kerala

External links• OECD work on financial markets [6]

• Wharton Finance Knowledge Project [7] - aimed to offer free access to finance knowledge for students, teachers,and self-learners.

• Professor Aswath Damodaran [8] (New York University Stern School of Business) - provides resources coveringthree areas in finance: corporate finance, valuation and investment management and syndicate finance.

References[1] Gove, P. et al. 1961. Finance. Webster's Third New International Dictionary of the English Language Unabridged. Springfield,

Massachusetts: G. & C. Merriam Company.[2] finance. (2009). In Encyclopædia Britannica. Retrieved June 23, 2009, from Encyclopædia Britannica Online: Finance (http:/ / www.

britannica. com/ EBchecked/ topic/ 207147/ finance)[3] Charitytimes.com (http:/ / www. charitytimes. com/ pages/ ct_news/ news archive/ July_06_news/ 030706_wellcome_trust_charity_bond.

htm)[4] Board of Governors of Federal Reserve System of the United States. Mission of the Federal Reserve System. Federalreserve.gov (http:/ /

www. federalreserve. gov/ aboutthefed/ mission. htm) Accessed: 2010-01-16. (Archived by WebCite at Webcitation.org (http:/ / www.webcitation. org/ 5mpS52OAl))

[5] Business.timesonline.co.uk (http:/ / business. timesonline. co. uk/ tol/ business/ industry_sectors/ natural_resources/ article5602963. ece)[6] http:/ / www. oecd. org/ finance[7] http:/ / knowledge. wharton. upenn. edu/ category. cfm?cid=1[8] http:/ / pages. stern. nyu. edu/ ~adamodar/

11

The main techniques and sectors of thefinancial industry

Financial servicesFinancial services refer to services provided by the finance industry. The finance industry encompasses a broadrange of organizations that deal with the management of money. Among these organizations are banks, credit cardcompanies, insurance companies, consumer finance companies, stock brokerages, investment funds and somegovernment sponsored enterprises. As of 2004, the financial services industry represented 20% of the marketcapitalization of the S&P 500 in the United States.[1]

History of financial services

In the United StatesThe term "financial services" became more prevalent in the United States partly as a result of theGramm-Leach-Bliley Act of the late 1990s, which enabled different types of companies operating in the U.S.financial services industry at that time to merge. Companies usually have two distinct approaches to this new type ofbusiness. One approach would be a bank which simply buys an insurance company or an investment bank, keeps theoriginal brands of the acquired firm, and adds the acquisition to its holding company simply to diversify its earnings.Outside the U.S. (e.g., in Japan), non-financial services companies are permitted within the holding company. In thisscenario, each company still looks independent, and has its own customers, etc. In the other style, a bank wouldsimply create its own brokerage division or insurance division and attempt to sell those products to its own existingcustomers, with incentives for combining all things with one company.

BanksA "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used todistinguish it from an "investment bank", a type of financial services entity which, instead of lending money directlyto a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

Banking servicesThe primary operations of banks include:• Keeping money safe while also allowing withdrawals when needed• Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post• Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or

business)• Issuance of credit cards and processing of credit card transactions and billing• Issuance of debit cards for use as a substitute for checks• Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)• Provide wire transfers of funds and Electronic fund transfers between banks• Facilitation of standing orders and direct debits, so payments for bills can be made automatically• Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending

commitments of a customer in their current account.

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• Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.• Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified

check.• Notary service for financial and other documents

Other types of bank services• Private banking - Private banks provide banking services exclusively to high net worth individuals. Many

financial services firms require a person or family to have a certain minimum net worth to qualify for privatebanking services.[2] Private banks often provide more personal services, such as wealth management and taxplanning, than normal retail banks.[3]

• Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwritingand advisory fees), and restructure debt into structured finance products.

• Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.• Credit card machine services and networks - Companies which provide credit card machine and payment

networks call themselves "merchant card providers".

Foreign exchange servicesForeign exchange services are provided by many banks around the world. Foreign exchange services include:• Currency Exchange - where clients can purchase and sell foreign currency banknotes.• Wire transfer - where clients can send funds to international banks abroad.• Foreign Currency Banking - banking transactions are done in foreign currency.

Investment services• Asset management - the term usually given to describe companies which run collective investment funds.• Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major

investment banks to execute their trades.• Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated

portfolios. Assets under custody in the world are approximately $100 trillion.[4]

Insurance• Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and casualty insurance)

on behalf of customers. Recently a number of websites have been created to give consumers basic pricecomparisons for services such as insurance, causing controversy within the industry.[5]

• Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, aservice still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offersimilar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance,retirement insurance, health insurance, and property & casualty insurance.

• Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.

Financial services 13

Other financial services• Intermediation or advisory services - These services involve stock brokers (private client services) and discount

brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are oftenreferred to as discount brokerages, although many now have branch offices to assist clients. These brokeragesprimarily target individual investors. Full service and private client firms primarily assist and execute trades forclients with large amounts of capital to invest, such as large companies, wealthy individuals, and investmentmanagement funds.

• Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakesin businesses that are either private, or taken private once acquired. Private equity funds often use leveragedbuyouts (LBOs) to acquire the firms in which they invest. The most successful private equity funds can generatereturns significantly higher than provided by the equity markets

• Venture capital is a type of private equity capital typically provided by professional, outside investors to new,high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business.

• Angel investment - An angel investor or angel (known as a business angel or informal investor in Europe), is anaffluent individual who provides capital for a business start-up, usually in exchange for convertible debt orownership equity. A small but increasing number of angel investors organize themselves into angel groups orangel networks to share research and pool their investment capital.

• Conglomerates - A financial services conglomerate is a financial services firm that is active in more than onesector of the financial services market e.g. life insurance, general insurance, health insurance, asset management,retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses isthe existence of diversification benefits that are present when different types of businesses are aggregated i.e. badthings don't always happen at the same time. As a consequence, economic capital for a conglomerate is usuallysubstantially less than economic capital is for the sum of its parts.

Financial crime

UKFraud within the financial industry costs the UK an estimated £14bn a year and it is believed a further £25bn islaundered by British institutions.[6]

Market shareThe financial services industry constitutes the largest group of companies in the world in terms of earnings andequity market cap. However it is not the largest category in terms of revenue or number of employees. It is also aslow growing and extremely fragmented industry, with the largest company (Citigroup), only having a 3 % USmarket share.[7] In contrast, the largest home improvement store in the US, Home Depot, has a 30 % market share,and the largest coffee house Starbucks has a 32 % market share.

Financial services 14

See also• Accounting scandals• BFSI• European Financial Services Roundtable• Financial analyst• Financial data vendors• Financial markets• Financialization• Financial transaction tax• Government sponsored enterprise• Institutional customers• International Monetary Fund• Investment management• List of banks• List of investment banks• Misleading financial analysis• Thomson Financial League Tables

References[1] "The Mistakes Of Our Grandparents?" (http:/ / www. contraryinvestor. com/ 2004archives/ mofeb04. htm). Contrary Investor.com. February

2004. . Retrieved 2009-02-06.[2] "Private Banking definition" (http:/ / www. investorwords. com/ 5946/ private_banking. html). Investor Words.com. . Retrieved 2009-02-06.[3] "How Swiss Bank Accounts Work" (http:/ / money. howstuffworks. com/ personal-finance/ banking/ swiss-bank-account. htm). How Stuff

Works. . Retrieved 2009-02-06.[4] http:/ / www. globalcustody. net/ no_cookie/ custody_assets_worldwide/ GlobalCustody.net Asset Table[5] "Price comparison sites face probe" (http:/ / news. bbc. co. uk/ 1/ hi/ business/ 7201345. stm). BBC News. 2008-01-22. . Retrieved

2009-02-06.[6] "Watchdog warns of criminal gangs inside banks" (http:/ / money. guardian. co. uk/ news_/ story/ 0,1456,1643860,00. html). The Guardian

(London). 2005-11-16. . Retrieved 2007-11-30.[7] The Opportunity: Small Global Market Share (http:/ / www. citigroup. com/ citigroup/ fin/ data/ p040602. pdf), Page 11, from the Sanford C.

Bernstein & Co. Strategic Decisions Conference - 6/02/04

• Porteous, Bruce T.; Pradip Tapadar (December 2005). Economic Capital and Financial Risk Management forFinancial Services Firms and Conglomerates. Palgrave Macmillan. ISBN 1-4039-3608-0.

• Schoppmann, Henning (Edit.); Julien Ernoult, Walburga Hemetsberger, Christoph Wengler (September 2008).European Banking and Financial Services Law - Third Edition. Larcier. ISBN 2-8044-3180-0.

15

Personal finance

Personal financePersonal finance is the application of the principles of finance to the monetary decisions of an individual or familyunit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources overtime, taking into account various financial risks and future life events. Components of personal finance mightinclude checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirementplans, social security benefits, insurance policies, and income tax management.

Personal financial planningA key component of personal finance is financial planning, a dynamic process that requires regular monitoring andreevaluation. In general, it has five steps:1. Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial

balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car,house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage).A personal income statement lists personal income and expenses.

2. Setting goals: Two examples are "retire at age 65 with a personal net worth of $1,000,000" and "buy a house in 3years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is notuncommon to have several goals, some short term and some long term. Setting financial goals helps directfinancial planning.

3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example,reducing unnecessary expenses, increasing one's employment income, or investing in the stock market.

4. Execution: Execution of one's personal financial plan often requires discipline and perseverance. Many peopleobtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.

5. Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possibleadjustments or reassessments.

Typical goals most adults have are paying off credit card and or student loan debt, retirement, college costs forchildren, medical expenses, and estate planning.The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:1 - Financial Position: this area is concerned with understanding the personal resources available by examining networth and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets under thatperson's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all theexpected sources of income within a year, minus all expected expenses within the same year. From this analysis, thefinancial planner can determine to what degree and in what time the personal goals can be accomplished.2 - Adequate Protection: the analysis of how to protect a household from unforeseen risks. These risks can bedivided into liability, property, death, disability, health and long term care. Some of these risks may beself-insurable, while most will require the purchase of an insurance contract. Determining how much insurance toget, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners,professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves.Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of theoverall investment planning.

Personal finance 16

3 - Tax Planning: typically the income tax is the single largest expense in a household. Managing taxes is not aquestion of if you will pay taxes, but when and how much. Government gives many incentives in the form of taxdeductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use aprogressive tax. Typically, as your income grows, you pay a higher marginal rate of tax. Understanding how to takeadvantage of the myriad tax breaks when planning your personal finances can make a significant impact upon yoursuccess.4 - Investment and Accumulation Goals: planning how to accumulate enough money to acquire items with a highprice is what most people consider to be financial planning. The major reasons to accumulate assets is for thefollowing: a - purchasing a house b - purchasing a car c - starting a business d - paying for education expenses e -accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.Achieving these goals requires projecting what they will cost, and when you need to withdraw funds. A major risk tothe household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using netpresent value calculators, the financial planner will suggest a combination of asset earmarking and regular savings tobe invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to geta higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risksis most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. Thisasset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternativeinvestments. The allocation should also take into consideration the personal risk profile of every investor, since riskattitudes vary from person to person.5 - Retirement Planning: retirement planning is the process of understanding how much it costs to live at retirement,and coming up with a plan to distribute assets to meet any income shortfall.6 - Estate Planning: involves planning for the disposition of your asset when you die. Typically, there is a tax due tothe state or federal government at your death. Avoiding these taxes means that more of your assets will be distributedto your heirs. You can leave your assets to family, friends or charitable groups.

See also• Accounting software• Corporate finance• Credit card debt• Debt consolidation• Equity investment• Financial literacy• Financial Literacy Month• Family planning• Insurance• Investment• List of personal finance related articles• Mortgage loan• Payday loan• Pension• Personal budget• Personal financial management• Separately managed account• Settlement (finance)• Wealth• Wealth management

Personal finance 17

References• Kwok, H., Milevsky, M., and Robinson, C. (1994) Asset Allocation, Life Expectancy, and Shortfall, Financial

Services Review, 1994, vol 3(2), pg. 109-126.

External links• Free Journal of Financial Counseling and Planning articles [1].

References[1] http:/ / www. afcpe. org/ publications/ journal-articles. php

18

Corporate finance

Corporate finance

Domestic credit to private sector in 2005

Corporate finance is an area of finance dealing with financialdecisions business enterprises make and the tools and analysis used tomake these decisions. The primary goal of corporate finance is tomaximize corporate value [1] while managing the firm's financial risks.Although it is in principle different from managerial finance whichstudies the financial decisions of all firms, rather than corporationsalone, the main concepts in the study of corporate finance areapplicable to the financial problems of all kinds of firms.

The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisionsare long-term choices about which projects receive investment, whether to finance that investment with equity ordebt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can begrouped under the heading "Working capital management". This subject deals with the short-term balance of currentassets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending(such as the terms on credit extended to customers).The terms corporate finance and corporate financier are also associated with investment banking. The typical roleof an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that bestfits those needs.

Capital investment decisionsCapital investment decisions [2] are long-term corporate finance decisions relating to fixed assets and capitalstructure. Decisions are based on several inter-related criteria. (1) Corporate management seeks to maximize thevalue of the firm by investing in projects which yield a positive net present value when valued using an appropriatediscount rate. (2) These projects must also be financed appropriately. (3) If no such opportunities exist, maximizingshareholder value dictates that management must return excess cash to shareholders (i.e., distribution via dividends).Capital investment decisions thus comprise an investment decision, a financing decision, and a dividend decision.

The investment decisionManagement must allocate limited resources between competing opportunities (projects) in a process known ascapital budgeting [3] . Making this capital allocation decision requires estimating the value of each opportunity orproject, which is a function of the size, timing and predictability of future cash flows.

Project valuation

In general [4] , each project's value will be estimated using a discounted cash flow (DCF) valuation, and theopportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (applied toCorporate Finance by Joel Dean in 1951; see also Fisher separation theorem, John Burr Williams: theory). Thisrequires estimating the size and timing of all of the incremental cash flows resulting from the project. Such futurecash flows are then discounted to determine their present value (see Time value of money). These present values arethen summed, and this sum net of the initial investment outlay is the NPV. See Financial modeling.

Corporate finance 19

The NPV is greatly affected by the discount rate. Thus, identifying the proper discount rate - often termed, theproject "hurdle rate" [5] - is critical to making an appropriate decision. The hurdle rate is the minimum acceptablereturn on an investment—i.e. the project appropriate discount rate. The hurdle rate should reflect the riskiness of theinvestment, typically measured by volatility of cash flows, and must take into account the financing mix. Managersuse models such as the CAPM or the APT to estimate a discount rate appropriate for a particular project, and use theweighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing adiscount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not beappropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.)In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance.These are visible from the DCF and include discounted payback period, IRR, Modified IRR, equivalent annuity,capital efficiency, and ROI. Alternatives (complements) to NPV include MVA / EVA (Stern Stewart & Co) andAPV (Stewart Myers). See list of valuation topics.

Valuing flexibility

In many cases, for example R&D projects, a project may open (or close) paths of action to the company, but thisreality will not typically be captured in a strict NPV approach.[6] Management will therefore (sometimes) employtools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average orscenario specific cash flows are discounted, here the “flexibile and staged nature” of the investment is modelled, andhence "all" potential payoffs are considered. The difference between the two valuations is the "value of flexibility"inherent in the project.The two most common tools are Decision Tree Analysis (DTA) [7] and Real options analysis (ROA) [8] ; they mayoften be used interchangeably:• DTA values flexibility by incorporating possible events (or states) and consequent management decisions. (For

example, a company would build a factory given that demand for its product exceeded a certain level during thepilot-phase, and outsource production otherwise. In turn, given further demand, it would similarly expand thefactory, and maintain it otherwise. In a DCF model, by contrast, there is no "branching" - each scenario must bemodelled separately.) In the decision tree, each management decision in response to an "event" generates a"branch" or "path" which the company could follow; the probabilities of each event are determined or specifiedby management. Once the tree is constructed: (1) "all" possible events and their resultant paths are visible tomanagement; (2) given this “knowledge” of the events that could follow, and assuming rational decision making,management chooses the actions corresponding to the highest value path probability weighted; (3) this path isthen taken as representative of project value. See Decision theory: Choice under uncertainty.

• ROA is usually used when the value of a project is contingent on the value of some other asset or underlyingvariable. (For example, the viability of a mining project is contingent on the price of gold; if the price is too low,management will abandon the mining rights, if sufficiently high, management will develop the ore body. Again, aDCF valuation would capture only one of these outcomes.) Here: (1) using financial option theory as aframework, the decision to be taken is identified as corresponding to either a call option or a put option; (2) anappropriate valuation technique is then employed - usually a variant on the Binomial options model or a bespokesimulation model, while Black Scholes type formulae are used less often; see Contingent claim valuation. (3) The"true" value of the project is then the NPV of the "most likely" scenario plus the option value. (Real options incorporate finance were first discussed by Stewart Myers in 1977; viewing corporate strategy as a series of optionswas originally per Timothy Luehrman, in the late 1990s.)

Corporate finance 20

Quantifying uncertainty

Given the uncertainty inherent in project forecasting and valuation,[9] analysts will wish to assess the sensitivity ofproject NPV to the various inputs (i.e. assumptions) to the DCF model. In a typical sensitivity analysis the analystwill vary one key factor while holding all other inputs constant, ceteris paribus. The sensitivity of NPV to a changein that factor is then observed, and is calculated as a "slope": ΔNPV / Δfactor. For example, the analyst willdetermine NPV at various growth rates in annual revenue as specified (usually at set increments, e.g. -10%, -5%,0%, 5%....), and then determine the sensitivity using this formula. Often, several variables may be of interest, andtheir various combinations produce a "value-surface" (or even a "value-space"), where NPV is then a function ofseveral variables. See also Stress testing.Using a related technique, analysts also run scenario based forecasts of NPV. Here, a scenario comprises a particularoutcome for economy-wide, "global" factors (demand for the product, exchange rates, commodity prices, etc...) aswell as for company-specific factors (unit costs, etc...). As an example, the analyst may specify various revenuegrowth scenarios (e.g. 5% for "Worst Case", 10% for "Likely Case" and 25% for "Best Case"), where all key inputsare adjusted so as to be consistent with the growth assumptions, and calculate the NPV for each. Note that forscenario based analysis, the various combinations of inputs must be internally consistent, whereas for the sensitivityapproach these need not be so. An application of this methodology is to determine an "unbiased" NPV, wheremanagement determines a (subjective) probability for each scenario – the NPV for the project is then theprobability-weighted average of the various scenarios.A further advancement is to construct stochastic or probabilistic financial models – as opposed to the traditionalstatic and deterministic models as above. For this purpose, the most common method is to use Monte Carlosimulation to analyze the project’s NPV. This method was introduced to finance by David B. Hertz in 1964, althoughhas only recently become common: today analysts are even able to run simulations in spreadsheet based DCFmodels, typically using an add-in, such as Crystal Ball. Here, the cash flow components that are (heavily) impactedby uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to the scenarioapproach above, the simulation produces several thousand random but possible outcomes, or "trials"; see MonteCarlo Simulation versus “What If” Scenarios. The output is then a histogram of project NPV, and the average NPVof the potential investment – as well as its volatility and other sensitivities – is then observed. This histogramprovides information not visible from the static DCF: for example, it allows for an estimate of the probability that aproject has a net present value greater than zero (or any other value).Continuing the above example: instead of assigning three discrete values to revenue growth, and to the other relevantvariables, the analyst would assign an appropriate probability distribution to each variable (commonly triangular orbeta), and, where possible, specify the observed or supposed correlation between the variables. These distributionswould then be "sampled" repeatedly - incorporating this correlation - so as to generate several thousand scenarios,with corresponding valuations, which are then used to generate the NPV histogram. The resultant statistics (averageNPV and standard deviation of NPV) will be a more accurate mirror of the project's "randomness" than the varianceobserved under the scenario based approach. (These are often used as estimates of the underlying "spot price" andvolatility for the real option valuation as above; see Real options analysis: Model inputs.)

The financing decisionAchieving the goals of corporate finance requires that any corporate investment be financed appropriately [10] . Asabove, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mixcan impact the valuation. Management must therefore identify the "optimal mix" of financing—the capital structurethat results in maximum value. (See Balance sheet, WACC, Fisher separation theorem; but, see also theModigliani-Miller theorem.)The sources of financing will, generically, comprise some combination of debt and equity financing. Financing a project through debt results in a liability or obligation that must be serviced, thus entailing cash flow implications

Corporate finance 21

independent of the project's degree of success. Equity financing is less risky with respect to cash flow commitments,but results in a dilution of ownership, control and earnings. The cost of equity is also typically higher than the cost ofdebt (see CAPM and WACC), and so equity financing may result in an increased hurdle rate which may offset anyreduction in cash flow risk.Management must also attempt to match the financing mix to the asset being financed as closely as possible, in termsof both timing and cash flows.One of the main theories of how firms make their financing decisions is the Pecking Order Theory, which suggeststhat firms avoid external financing while they have internal financing available and avoid new equity financing whilethey can engage in new debt financing at reasonably low interest rates. Another major theory is the Trade-OffTheory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt whenmaking their decisions. An emerging area in finance theory is right-financing whereby investment banks andcorporations can enhance investment return and company value over time by determining the right investmentobjectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure frameworkwithin a given economy and under given market conditions. One last theory about this decision is the Market timinghypothesis which states that firms look for the cheaper type of financing regardless of their current levels of internalresources, debt and equity.

The dividend decisionWhether to issue dividends,[11] and what amount, is calculated mainly on the basis of the company's unappropriatedprofit and its earning prospects for the coming year. If there are no NPV positive opportunities, i.e. projects wherereturns exceed the hurdle rate, then management must return excess cash to investors. These free cash flowscomprise cash remaining after all business expenses have been met.This is the general case, however there are exceptions. For example, investors in a "Growth stock", expect that thecompany will, almost by definition, retain earnings so as to fund growth internally. In other cases, even though anopportunity is currently NPV negative, management may consider “investment flexibility” / potential payoffs anddecide to retain cash flows; see above and Real options.Management must also decide on the form of the dividend distribution, generally as cash dividends or via a sharebuyback. Various factors may be taken into consideration: where shareholders must pay tax on dividends, firms mayelect to retain earnings or to perform a stock buyback, in both cases increasing the value of shares outstanding.Alternatively, some companies will pay "dividends" from stock rather than in cash; see Corporate action. Today, it isgenerally accepted that dividend policy is value neutral (see Modigliani-Miller theorem).

Working capital managementDecisions relating to working capital and short term financing are referred to as working capital management[12] .These involve managing the relationship between a firm's short-term assets and its short-term liabilities.As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capitalinvestment decisions, firm value is enhanced through appropriately selecting and funding NPV positive investments.These investments, in turn, have implications in terms of cash flow and cost of capital.The goal of Working capital management is therefore to ensure that the firm is able to operate, and that it hassufficient cash flow to service long term debt, and to satisfy both maturing short-term debt and upcoming operationalexpenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; SeeEconomic value added (EVA).

Corporate finance 22

Decision criteriaWorking capital is the amount of capital which is readily available to an organization. That is, working capital is thedifference between resources in cash or readily convertible into cash (Current Assets), and cash requirements(Current Liabilities). As a result, the decisions relating to working capital are always current, i.e. short term,decisions.In addition to time horizon, working capital decisions differ from capital investment decisions in terms ofdiscounting and profitability considerations; they are also "reversible" to some extent. (Considerations as to Riskappetite and return targets remain identical, although some constraints - such as those imposed by loan covenants -may be more relevant here).Working capital management decisions are therefore not taken on the same basis as long term decisions, andworking capital management applies different criteria in decision making: the main considerations are (1) cash flow /liquidity and (2) profitability / return on capital (of which cash flow is probably the more important).• The most widely used measure of cash flow is the net operating cycle, or cash conversion cycle. This represents

the time difference between cash payment for raw materials and cash collection for sales. The cash conversioncycle indicates the firm's ability to convert its resources into cash. Because this number effectively corresponds tothe time that the firm's cash is tied up in operations and unavailable for other activities, management generallyaims at a low net count. (Another measure is gross operating cycle which is the same as net operating cycleexcept that it does not take into account the creditors deferral period.)

• In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as apercentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity(ROE) shows this result for the firm's shareholders. As above, firm value is enhanced when, and if, the return oncapital, exceeds the cost of capital. ROC measures are therefore useful as a management tool, in that they linkshort-term policy with long-term decision making.

Management of working capitalGuided by the above criteria, management will use a combination of policies and techniques for the management ofworking capital [13] . These policies aim at managing the current assets (generally cash and cash equivalents,inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.• Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but

reduces cash holding costs.• Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces

the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supplychain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).

• Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, suchthat any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Returnon Capital (or vice versa); see Discounts and allowances.

• Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: theinventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan(or overdraft), or to "convert debtors to cash" through "factoring".

Corporate finance 23

Financial risk managementRisk management [14] is the process of measuring risk and then developing and implementing strategies to managethat risk. Financial risk management focuses on risks that can be managed ("hedged") using traded financialinstruments (typically changes in commodity prices, interest rates, foreign exchange rates and stock prices).Financial risk management will also play an important role in cash management.This area is related to corporate finance in two ways. Firstly, firm exposure to business risk is a direct result ofprevious Investment and Financing decisions. Secondly, both disciplines share the goal of enhancing, or preserving,firm value. All large corporations have risk management teams, and small firms practice informal, if not formal, riskmanagement. There is a fundamental debate on the value of "Risk Management" and shareholder value thatquestions a shareholder's desire to optimize risk versus taking exposure to pure risk. The debate links value of riskmanagement in a market to the cost of bankruptcy in that market.Derivatives are the instruments most commonly used in financial risk management. Because unique derivativecontracts tend to be costly to create and monitor, the most cost-effective financial risk management methods usuallyinvolve derivatives that trade on well-established financial markets or exchanges. These standard derivativeinstruments include options, futures contracts, forward contracts, and swaps. More customized and secondgeneration derivatives known as exotics trade over the counter aka OTC.

See: Financial engineering; Financial risk; Default (finance); Credit risk; Interest rate risk; Liquidity risk;Market risk; Operational risk; Volatility risk; Settlement risk; Value at Risk;.

Relationship with other areas in finance

Investment bankingUse of the term “corporate finance” varies considerably across the world. In the United States it is used, as above, todescribe activities, decisions and techniques that deal with many aspects of a company’s finances and capital. In theUnited Kingdom and Commonwealth countries, the terms “corporate finance” and “corporate financier” tend to beassociated with investment banking - i.e. with transactions in which capital is raised for the corporation.[15]

Personal and public financeCorporate finance utilizes tools from almost all areas of finance. Some of the tools developed by and for corporationshave broad application to entities other than corporations, for example, to partnerships, sole proprietorships,not-for-profit organizations, governments, mutual funds, and personal wealth management. But in other cases theirapplication is very limited outside of the corporate finance arena. Because corporations deal in quantities of moneymuch greater than individuals, the analysis has developed into a discipline of its own. It can be differentiated frompersonal finance and public finance.

Related professional qualificationsQualifications related to the field include:• Finance qualifications:

• Degrees: Masters degree in Finance (MSF), Master of Financial Economics• Certifications: Chartered Financial Analyst (CFA), Corporate Finance Qualification (CF), Certified

International Investment Analyst (CIIA), Association of Corporate Treasurers (ACT), Certified MarketAnalyst (CMA/FAD) Dual Designation, Master Financial Manager (MFM), Master of Finance & Control(MFC), Certified Treasury Professional (CTP), Association for Financial Professionals, Certified Merger &Acquisition Advisor (CM&AA)

Corporate finance 24

• Business qualifications:• Degrees: Master of Business Administration (MBA), Master of Management (MM), Master of Science in

Management (MSM), Master of Commerce (M Comm), Doctor of Business Administration (DBA)• Certification: Certified Business Manager (CBM), Certified MBA (CMBA)

• Accountancy qualifications:• Qualified accountant: Chartered Accountant (ACA, CA), Certified Public Accountant (CPA), Chartered

Certified Accountant(ACCA), Chartered Management Accountant (CIMA)• Non-statutory qualifications: Chartered Cost Accountant (CCA Designation from AAFM), Certified

Management Accountant (CMA)

See also• Financial modeling• Business organizations• Financial planning• Investment bank• Managerial economics• Private equity• Real option• Venture capital• Right-financing• Factoring (finance)• Global Squeeze• Related topics by category:

• List of accounting topics• List of corporate finance topics• List of valuation topics• List of finance topics

References[1] See Corporate Finance: First Principles (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ AppldCF/ other/ Image2. gif), Aswath

Damodaran, New York University's Stern School of Business[2] The framework for this section is based on Notes (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ AppldCF/ other/ Image2. gif)

by Aswath Damodaran at New York University's Stern School of Business[3] See Investment Decisions and Capital Budgeting (http:/ / www. duke. edu/ ~charvey/ Classes/ ba350_1997/ vcf2/ vcf2. htm), Prof. Campbell

R. Harvey, The Investment Decision of the Corporation (http:/ / www. bus. lsu. edu/ academics/ finance/ faculty/ dchance/ Instructional/FinancialManagementDecisions. ppt#257,2,Slide), Prof. Don M. Chance

[4] See Valuation (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ lectures/ val. html), Prof. Aswath Damodaran and EquityValuation (http:/ / www. duke. edu/ ~charvey/ Classes/ ba350_1997/ vcf1/ vcf1. htm), Prof. Campbell R. Harvey

[5] See for example Campbell R. Harvey's Hypertextual Finance Glossary (http:/ / biz. yahoo. com/ f/ g/ hh. html) or investopedia.com (http:/ /www. investopedia. com/ terms/ h/ hurdlerate. asp)

[6] See Real Options Analysis and the Assumptions of the NPV Rule (http:/ / www. realoptions. org/ papers2002/ SchockleyOptionNPV. pdf. ),Tom Arnold & Richard Shockley

[7] See Decision Tree Analysis (http:/ / www. mindtools. com/ pages/ article/ newTED_04. htm), mindtools.com and Decision Tree Primer(http:/ / www. public. asu. edu/ ~kirkwood/ DAStuff/ decisiontrees/ index. html), Prof. Craig W. Kirkwood Arizona State University

[8] See Identifying real options (http:/ / faculty. fuqua. duke. edu/ ~charvey/ Teaching/ BA456_2002/ Identifying_real_options. htm) Prof.Campbell R. Harvey, Applications of option pricing theory to equity valuation (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/lectures/ opt. html) Prof. Aswath Damodaran, How Do You Assess The Value of A Company's "Real Options"? (http:/ / www.expectationsinvesting. com/ tutorial11. shtml), Prof. Alfred Rappaport Columbia University & Michael Mauboussin

Corporate finance 25

[9] See Probabilistic Approaches: Scenario Analysis, Decision Trees and Simulations (http:/ / www. stern. nyu. edu/ ~adamodar/ pdfiles/ papers/probabilistic. pdf), Prof. Aswath Damodaran

[10] See The Financing Decision of the Corporation (http:/ / www. bus. lsu. edu/ academics/ finance/ faculty/ dchance/ Instructional/FinancialManagementDecisions. ppt#256,1,Slide), Prof. Don M. Chance, Capital Structure (http:/ / pages. stern. nyu. edu/ ~adamodar/New_Home_Page/ lectures/ capstr. html), Prof. Aswath Damodaran

[11] See Dividend Policy (http:/ / pages. stern. nyu. edu/ ~adamodar/ New_Home_Page/ lectures/ dividend. html), Prof. Aswath Damodaran[12] See Working Capital Management (http:/ / www. studyfinance. com/ lessons/ workcap/ index. mv), Studyfinance.com; Working Capital

Management (http:/ / www. treasury. govt. nz/ publicsector/ workingcapital/ chap2. asp), treasury.govt.nz[13] See The 20 Principles of Financial Management (http:/ / www. bus. lsu. edu/ academics/ finance/ faculty/ dchance/ Instructional/

PrinciplesofFinancialManagement. htm), Prof. Don M. Chance, Louisiana State University[14] See Professional Risk Managers' International Association (http:/ / www. prmia. org/ ) and Global Association of Risk Professionals (http:/ /

www. garp. com/ )[15] Beaney, Shaun, "Defining corporate finance in the UK" (http:/ / www. icaew. co. uk/ index. cfm?route=122299), The Institute of Chartered

Accountants, April 2005

Financial capital

Capital exports in 2006

Capital imports in 2006

Financial capital can refer to money used by entrepreneurs andbusinesses to buy what they need to make their products or providetheir services or to that sector of the economy based on its operation,i.e. retail, corporate, investment banking, etc.

Financial Capital vs. Real Capital

Financial Capital refers to the funds provided by lenders (andinvestors) to businesses to purchase real capital equipment forproducing goods/services. Real Capital or Economic Capitalcomprises physical goods that assist in the production of other goodsand services, e.g. shovels for gravediggers, sewing machines fortailors, or machinery and tooling for factories.

Financial Capital is provided by lenders for a price: interest. Also seetime value of money for a more detailed description of how financialcapital may be analyzed.

Furthermore, financial capital, is any liquid medium or mechanism that represents wealth, or other styles of capital.It is, however, usually purchasing power in the form of money available for the production or purchasing of goods,etcetera. Capital can also be obtained by producing more than what is immediately required and saving the surplus.Financial capital has been subcategorized by some academics as economic or productive capital necessary foroperations, signaling capital which signals a company's financial strength to shareholders, and regulatory capitalwhich fulfills capital requirements.[1]

Financial capital 26

Sources of capital• Long Term - usually above 7 years

• Share Capital• Mortgage loan• Retained Profit• Venture Capital• Debenture• Project Finance

• Medium Term - usually between 2 and 7 years• Term Loans• Leasing• Hire Purchase

• Short Term - usually under 2 years• Bank Overdraft• Trade Credit• Deferred Expenses• Factoring

Capital market• Long-term funds are bought and sold:

• Shares• Debentures• Long-term loans, often with a mortgage bond as security• Reserve funds• Euro Bonds

Money market• Financial institutions can use short-term savings to lend out in the form of short-term loans:

• Credit on open account• Bank overdraft• Short-term loans• Bills of exchange• Factoring of debtors

Differences between shares and debentures• Shareholders are effectively owners; debenture-holders are creditors.• Shareholders may vote at AGMs and be elected as directors; debenture-holders may not vote at AGMs or be

elected as directors.• Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest.• If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of

whether or not a profit has been made.• In case of dissolution of firms debenture holders are paid first as compared to shareholder.

Financial capital 27

Fixed capitalThis is money which is used to purchase assets that will remain permanently in the business and help it to make aprofit.

Factors determining fixed capital requirements• Nature of business• Size of business• Stage of development• Capital invested by the owners• location of that area

Working capitalWorking capital is money which is used to buy stock, pay expenses and finance credit.

Factors determining working capital requirements• Size of business• Stage of development• Time of production• Rate of stock turnover ratio• Buying and selling terms• Seasonal consumption• Seasonal product• profit level• growth and expansion• production cycle• general nature of business• business cycle

InstrumentsA contract regarding any combination of capital assets is called a financial instrument, and may serve as a• medium of exchange,• standard of deferred payment,• unit of account, or• store of value.Most indigenous forms of money (wampum, shells, tally sticks and such) and the modern fiat money is only a"symbolic" storage of value and not a real storage of value like commodity money.

Capital vs. moneyLiquidity requirements of these vary significantly – leading to a diversity of contracts and financial markets to tradethem on. When all four functions are served by one instrument, this is called money, which does not need to betraded on financial markets since the risk of loss of value of money is uniform across the whole society. Where noone form of money is agreed to have reliable value, and barter is undesirable, less liquid or more diverse instrumentshave served the four functions. This article focuses mostly on financial instruments which are not uniformly affectedby native currency inflation and which are not guaranteed by a state.

Financial capital 28

Own and borrowed capitalCapital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings orinheritance, is known as own capital or equity, whereas that which is granted by another person or institution iscalled borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is namedleverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.

Borrowed capitalThis is capital which the business borrows from institutions or people, and includes debentures:• Redeemable debentures• Irredeemable debentures• Debentures to bearer• Ordinary debentures

Own capitalThis is capital that owners of a business (shareholders and partners, for example) provide:• Preference shares/hybrid source of finance

• Ordinary preference shares• Cumulative preference shares• Participating preference shares

• Ordinary shares• Bonus shares• Founders' sharesThese have preference over the equity shares. This means the payments made to the shareholders are first paid to thepreference shareholder(s) and then to the equity shareholders.

Issuing and tradingLike money, financial instruments may be "backed" by state military fiat, credit (i.e. social capital held by banks andtheir depositors), or commodity resources. Governments generally closely control the supply of it and usually requiresome "reserve" be held by institutions granting credit. Trading between various national currency instruments isconducted on a money market. Such trading reveals differences in probability of debt collection or store of valuefunction of that currency, as assigned by traders.When in forms other than money, financial capital may be traded on bond markets or reinsurance markets withvarying degrees of trust in the social capital (not just credits) of bond-issuers, insurers, and others who issue andtrade in financial instruments. When payment is deferred on any such instrument, typically an interest rate is higherthan the standard interest rates paid by banks, or charged by the central bank on its money. Often such instrumentsare called fixed-income instruments if they have reliable payment schedules associated with the uniform rate ofinterest. A variable-rate instrument, such as many consumer mortgages, will reflect the standard rate for deferredpayment set by the central bank prime rate, increasing it by some fixed percentage. Other instruments, such as citizenentitlements, e.g. "U.S. Social Security", or other pensions, may be indexed to the rate of inflation, to provide areliable value stream.Trading in stock markets or commodity markets is actually trade in underlying assets which are not wholly financial in themselves, although they often move up and down in value in direct response to the trading in more purely financial derivatives. Typically commodity markets depend on politics that affect international trade, e.g. boycotts and embargoes, or factors that influence natural capital, e.g. weather that affects food crops. Meanwhile, stock markets are more influenced by trust in corporate leaders, i.e. individual capital, by consumers, i.e. social capital or

Financial capital 29

"brand capital" (in some analyses), and internal organizational efficiency, i.e. instructional capital and infrastructuralcapital. Some enterprises issue instruments to specifically track one limited division or brand. "Financial futures","Short selling" and "financial options" apply to these markets, and are typically pure financial bets on outcomes,rather than being a direct representation of any underlying asset.

Broadening the notionThe relationship between financial capital, money, and all other styles of capital, especially human capital or labor, isassumed in central bank policy and regulations regarding instruments as above.Such relationships and policies are characterized by a political economy - feudalist, socialist, capitalist, green,anarchist or otherwise. In effect, the means of money supply and other regulations on financial capital represent theeconomic sense of the value system of the society itself, as they determine the allocation of labor in that society.So, for instance, rules for increasing or reducing the money supply based on perceived inflation, or on measuringwell-being, reflect some such values, reflect the importance of using (all forms of) financial capital as a stable storeof value. If this is very important, inflation control is key - any amount of money inflation reduces the value offinancial capital with respect to all other types.If, however, the medium of exchange function is more critical, new money may be more freely issued regardless ofimpact on either inflation or well-being.

Marxian PerspectivesIt is common in Marxist theory to refer to the role of "Finance Capital" as the determining and ruling class interest incapitalist society, particularly in the latter stages.[2] [3]

ValuationNormally, a financial instrument is priced accordingly to the perception by capital market players of its expectedreturn and risk.Unit of account functions may come into question if valuations of complex financial instruments vary drasticallybased on timing. The "book value", "mark-to-market" and "mark-to-future"[4] conventions are three differentapproaches to reconciling financial capital value units of account.

Economic roleSocialism, capitalism, feudalism, anarchism, other civic theories take markedly different views of the role offinancial capital in social life, and propose various political restrictions to deal with that.Finance capitalism is the production of profit from the manipulation of financial capital. It is held in contrast toindustrial capitalism, where profit is made from the manufacture of goods.

See also• banking• capital• capital market• Capitalism• finance• financialization• Financial commons• Five Capitals

Financial capital 30

• funding• money supply• list of finance topics• list of accounting topics• spiritual capital

ReferencesF. Boldizzoni, Means and Ends: The Idea of Capital in the West, 1500-1970, New York: Palgrave Macmillan, 2008,chapters 7-8

References[1] The Risk Report, April 2009. Volume XXXI No. 8. IRMI (http:/ / www. irmi. com/ ).[2] Imperialism, the Highest Stage of Capitalism ibid. Finance Capital and the Finance Oligarchy (http:/ / www. marxists. org/ archive/ lenin/

works/ 1916/ imp-hsc/ ch03. htm)[3] Monopoly-Finance Capital and the Paradox of Accumulation John Bellamy Foster and Robert W. McChesney [[Monthly Review (http:/ /

www. monthlyreview. org/ 091001foster-mcchesney. php)] Sept-Oct 2009][4] The New Generation of Risk Management for Hedge Funds and Private Equity Investments (http:/ / books. google. com/

books?id=2w0bRIv7cygC& pg=PA349& lpg=PA349& dq="mark-to-future"& source=bl& ots=-wAo4Ibldg&sig=a8u9-GRjc2ng_8ltgiKnus_cURk& hl=en& ei=l0YSSs_oEpLhtgea6oCSBA& sa=X& oi=book_result& ct=result& resnum=5#PPP1,M1),edited by Lars Jaeger, p. 349

Cornering the marketIn finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow theprice to be manipulated, by analogy to the general business jargon where a company described as having "corneredthe market" has a very high market share. The cornerer hopes to gain control of enough of the supply of thecommodity to be able to set the price for it.This can be done through several mechanisms. The most direct strategy is to simply buy up a large percentage of theavailable commodity offered for sale in some spot market and hoard it. With the advent of futures trading, a cornerermay buy a large number of futures contracts on a commodity and then sell them at a profit after inflating the price.Although there have been many attempts to corner markets in everything from tin to cattle, to date very few of theseattempts have ever succeeded; instead, most of these attempted corners have tended to break themselvesspontaneously. The party attempting to corner a market can become very vulnerable due to the size of their position,especially if their attempt becomes widely known. If the rest of the market senses weakness, it may resist anyattempt to artificially drive the market any further by actively taking opposing positions. When the price starts tomove against the cornerer, they are in a very difficult position, as it is likely to be impossible to exit much of theirposition without catastrophically moving prices against themselves. In such a situation, many other parties will beable to profit from the cornerer's need to unwind their position.An attempt to corner the market on orange juice futures plays a key role in the 1983 movie Trading Places. The twoprotagonists (played by Eddie Murphy and Dan Aykroyd) eventually foil their rivals' plan by short-selling thefutures, causing hundreds of millions of dollars in losses for the latter.

Cornering the market 31

Historical examples

1950s: The onion marketIn the late 1950s, United States onion farmers alleged that Chicago Mercantile Exchange traders were attempting tocorner the market on onions. Their complaints resulted in the passage of the Onion Futures Act, which bannedtrading in onion futures in the United States and remains in effect as of 2010.

1970s: The Hunt brothers and the silver marketBrothers Nelson Bunker Hunt and Herbert Hunt attempted to corner the world silver markets in the late 1970s andearly 1980s, at one stage holding the rights to more than half of the world's deliverable silver.[1] During Hunt'saccumulation of the precious metal silver prices rose from $11 an ounce in September 1979 to nearly $50 an ouncein January 1980.[2] Silver prices ultimately collapsed to below $11 an ounce two months later,[3] much of the fall ona single day now known as Silver Thursday.[4]

1990s: Hamanaka and the copper marketRogue trader Yasuo Hamanaka, Sumitomo Corporation's chief copper trader, attempted to corner the internationalcopper market over a ten year period leading up to 1996.[5] At one point during this "Sumitomo copper affair,"Hamanaka is believed to have controlled approximately 5% of the world copper market.[5] As his scheme collapsed,Sumitomo was left with large positions in the copper market, ultimately losing US$2.6 billion.[6] In 1997 Hamanakapleaded guilty to criminal charges stemming from his trading activity and was sentenced to an eight year prisonsentence.[6]

2008: Porsche and shares in VolkswagenDuring the Financial crisis of 2007-2010, Porsche cornered the market in shares of Volkswagen, gaining anestimated 6-12 billion Euros. Porsche claimed that its actions were intended to gain control of Volkswagen (whichthey did accomplish) rather than to manipulate the market; in this case, while cornering the market in Volkswagenshares, Porsche contracted with naked shorts—enabling it to perform a short squeeze on them. [7]

References[1] Gwynne, S. C. (September 2001), "Bunker HUNT", Texas Monthly (Austin, Texas, United States: Emmis Communications Corporation) 29

(9): p78.[2] Eichenwald, Kurt (1989-12-21). "2 Hunts Fined And Banned From Trades" (http:/ / query. nytimes. com/ gst/ fullpage.

html?res=950DE0DD103FF932A15751C1A96F948260). New York Times. . Retrieved 2008-06-29.[4] "Bunker's Busted Silver Bubble" (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,920875-2,00. html), Time Magazine (Time Inc.),

1980-05-12, , retrieved 2008-06-29[5] Gettler, Leon (2008-02-02), "Wake-up calls on rogue traders keep ringing, but who's answering the phone?" (http:/ / business. theage. com.

au/ wakeup-calls-on-rogue-traders-keep-ringing-but-whos-answering-the-phone-20080201-1plq. html), The Age, , retrieved 2008-06-29[6] Petersen, Melody (1999-05-21), "Merrill Charged With 2d Firm In Copper Case" (http:/ / query. nytimes. com/ gst/ fullpage.

html?res=9E00E0DC1F3EF932A15756C0A96F958260& sec=& spon=& pagewanted=all), New York Times, , retrieved 2008-06-29[7] "Squeezy money" (http:/ / www. economist. com/ finance/ displaystory. cfm?story_id=12523898), Economist, 2008-10-30, , retrieved

2008-11-01, "A Clever Move by Porsche on VW’s Stock" (http:/ / www. nytimes. com/ 2008/ 10/ 31/ business/ worldbusiness/ 31norris. html),New York Times; "Porsche crashes into controversy in the ultimate 'short squeeze'" (http:/ / www. telegraph. co. uk/ finance/ globalbusiness/3362913/ Porsche-crashes-into-controversy-in-the-ultimate-short-squeeze. html), The Telegraph

Insurance 32

InsuranceIn law and economics, insurance is a form of risk management primarily used to hedge against the risk of acontingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity toanother, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is theperson or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to becharged for a certain amount of insurance coverage, called the premium. Risk management, the practice ofappraising and controlling risk, has evolved as a discrete field of study and practice.The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of paymentto the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a large,possibly devastating loss. The insured receives a contract called the insurance policy which details the conditions andcircumstances under which the insured will be compensated.

PrinciplesInsurance involves pooling funds from many insured entities (known as exposures) in order to pay for relativelyuncommon but severely devastating losses which can occur to these entities. The insured entities are thereforeprotected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. Inorder to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk.Insurance is a commercial enterprise and a major part of the financial services industry, but individual entities canalso self-insure through saving money for possible future losses. [1]

InsurabilityRisk which can be insured by private companies typically share seven common characteristics.[2]

1. Large number of similar exposure units. Since insurance operates through pooling resources, the majority ofinsurance policies are provided for individual members of large classes, allowing insurers to benefit from the lawof large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London,which is famous for insuring the life or health of actors, actresses and sports figures. However, all exposures willhave particular differences, which may lead to different rates.

2. Definite Loss. The loss takes place at a known time, in a known place, and from a known cause. The classicexample is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuriesmay all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, forinstance, may involve prolonged exposure to injurious conditions where no specific time, place or cause isidentifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, withsufficient information, could objectively verify all three elements.

3. Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside thecontrol of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event forwhich there is only the opportunity for cost. Events that contain speculative elements, such as ordinary businessrisks, are generally not considered insurable.

4. Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiumsneed to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjustinglosses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For smalllosses these latter costs may be several times the size of the expected cost of losses. There is little point in payingsuch costs unless the protection offered has real value to a buyer.

5. Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy

Insurance 33

insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accountingstandards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer.If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See theU.S. Financial Accounting Standards Board standard number 113)

6. Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: theprobability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost hasmore to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof ofloss associated with a claim presented under that policy to make a reasonably definite and objective evaluation ofthe amount of the loss recoverable as a result of the claim.

7. Limited risk of catastrophically large losses. Insurable losses are ideally independent and non-catastrophic,meaning that the one losses do not happen all at once and individual losses are not severe enough to bankrupt theinsurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of theircapital base, on the order of 5 percent. Capital constrains insurers' ability to sell earthquake insurance as well aswind insurance in hurricane zones. In the U.S., flood risk is insured by the federal government. In commercial fireinsurance it is possible to find single properties whose total exposed value is well in excess of any individualinsurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a singleinsurer who syndicates the risk into the reinsurance market.

LegalWhen a company insures an individual entity, there are basic legal requirements. Several commonly cited legalprinciples of insurance include:[3]

1. Indemnity – the insurance company indemnifies, or compensates the insured in the case of certain losses only upto the insured's interest

2. Insurable interest – the insured typically must directly suffer from the loss. Insurable interest must exist whetherproperty insurance or insurance on a person is involved. The concept requires that the insured have a "stake" inthe loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insuranceinvolved and the nature of the property ownership or relationship between the persons.

3. Utmost good faith – the insured and the insurer are bound by a good faith bond of honesty and fairness4. Contribution – insurers which have similar obligations to the insured contribute in the indemnification,

according to some method5. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for

example, the insurer may sue those liable for insured's loss6. Causa Proxima or Proximate Cause – the cause of loss (the "peril") must be covered under the insuring

agreement of the policy, and dominant cause must not be excluded

IndemnificationTo "indemnify" means to make whole again, or to be put in the position that one was in, to the extent possible, priorto the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnityinsurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There aregenerally two types of insurance contracts that seek to indemnify an insured:1. an "indemnity" policy and2. a "pay on behalf" or "on behalf of"[4] policy.The difference is significant on paper, but rarely material in practice.An "indemnity" policy will never pay claims until the insured has paid out of pocket to some third party; for example, a visitor to the home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then

Insurance 34

would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000)[4] [5]

Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (thehomeowner) would not be out of pocket for anything. Most modern liability insurance is written on the basis of "payon behalf" language[4] .An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured'party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance 'policy'.Generally, an insurance contract includes, at a minimum, the following elements: the parties (the insurer, the insured,the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage(i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered).An insured is thus said to be "indemnified" against the loss covered in the policy.When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim'against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to theinsurer for assuming the risk is called the 'premium'. Insurance premiums from many insureds are used to fundaccounts reserved for later payment of claims—in theory for a relatively few claimants—and for overhead costs. Solong as an insurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin isan insurer's profit.

EffectsInsurance can have various effects on society through the way that it changes who bears the cost of losses anddamage. It can increase fraud. On the other hand, it can help societies and individuals prepare for catastrophes andmitigate the effects of catastrophes on both households and societies.Insurance can influence the probability of losses through moral hazard, insurance fraud, and preventive steps by theinsurance company. Insurance scholars have typically used morale hazard to refer to the increased loss due tounintentional carelessness and moral hazard to refer to increased risk due to intentional carelessness orindifference.[6] Insurers attempt to address carelessness through inspections, policy provisions requiring certain typesof maintenance, and possible discounts for loss mitigation efforts. While in theory insurers could encourageinvestment in loss reduction, some commentators have argued that in practice insurers had historically notaggressively pursued loss control measures - particularly to prevent disaster losses such as hurricanes - because ofconcerns over rate reductions and legal battles. However, beginning around 1996 insurers began to take a moreactive role in loss mitigation through building codes.[7]

Insurers' business model

Underwriting and investingThe business model can be reduced to a simple equation: Profit = earned premium + investment income - incurredloss - underwriting expensesInsurers make money in two ways:1. Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums

to charge for accepting those risks;2. By investing the premiums they collect from insured parties.The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and

Insurance 35

these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, theamount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer'sunderwriting profit on that policy. Of course, from the insurer's perspective, some policies are "winners" (i.e., theinsurer pays out less in claims and expenses than it receives in premiums and investment income) and some are"losers" (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income);insurance companies essentially use actuarial science to attempt to underwrite enough "winning" policies to pay outon the "losers" while still maintaining profitability.An insurer's underwriting performance is measured in its combined ratio[8] which is the ratio of losses and expensesto earned premiums. A combined ratio of less than 100 percent indicates underwriting profitability, while anythingover 100 indicates an underwriting loss. A company with a combined ratio over 100% may nevertheless remainprofitable due to investment earnings.Insurance companies earn investment profits on “float”. “Float” or available reserve is the amount of money, at handat any given moment, that an insurer has collected in insurance premiums but has not paid out in claims. Insurersstart investing insurance premiums as soon as they are collected and continue to earn interest or other income onthem until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% ofUK insurance services) has almost 20% of the investments in the London Stock Exchange.[9]

In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in thefive years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Someinsurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profitfrom float without an underwriting profit as well, but this opinion is not universally held.Naturally, the “float” method is difficult to carry out in an economically depressed period. Bear markets do causeinsurers to shift away from investments and to toughen up their underwriting standards. So a poor economygenerally means high insurance premiums. This tendency to swing between profitable and unprofitable periods overtime is commonly known as the "underwriting" or insurance cycle.[10]

Property and casualty insurers currently make the most money from their auto insurance line of business. Generallybetter statistics are available on auto losses and underwriting on this line of business has benefited greatly fromadvances in computing. Additionally, property losses in the United States, due to unpredictable natural catastrophes,have exacerbated this trend.

ClaimsClaims and loss handling is the materialized utility of insurance; it is the actual "product" paid for, though one hopesit will never need to be used. Claims may be filed by insureds directly with the insurer or through brokers or agents.The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standardindustry form such as those produced by ACORD.Insurance company claims departments employ a large number of claims adjusters supported by a staff of recordsmanagement and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusterswhose settlement authority varies with their knowledge and experience. The adjuster undertakes a thoroughinvestigation of each claim, usually in close cooperation with the insured, determines if coverage is available underthe terms of the insurance contract, and if so, the reasonable monetary value of the claim, and authorizes payment.Adjusting liability insurance claims is particularly difficult because there is a third party involved, the plaintiff, whois under no contractual obligation to cooperate with the insurer and may in fact regard the insurer as a deep pocket.The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel),monitor litigation that may take years to complete, and appear in person or over the telephone with settlementauthority at a mandatory settlement conference when requested by the judge.If a claims adjuster suspects underinsurance, the condition of average may come into play to limit the insurancecompany's exposure.

Insurance 36

In managing the claims handling function, insurers seek to balance the elements of customer satisfaction,administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulentinsurance practices are a major business risk that must be managed and overcome. Disputes between insurers andinsureds over the validity of claims or claims handling practices occasionally escalate into litigation; see insurancebad faith.

History of insuranceIn some sense we can say that insurance appears simultaneously with the appearance of human society. We know oftwo types of economies in human societies: money economies (with markets, money, financial instruments and soon) and non-money or natural economies (without money, markets, financial instruments and so on). The secondtype is a more ancient form than the first. In such an economy and community, we can see insurance in the form ofpeople helping each other. For example, if a house burns down, the members of the community help build a newone. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours willnot receive help in the future. This type of insurance has survived to the present day in some countries where modernmoney economy with its financial instruments is not widespread.Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part ofthe financial sphere), early methods of transferring or distributing risk were practised by Chinese and Babyloniantraders as long ago as the 3rd and 2nd millennia BC, respectively.[11] Chinese merchants travelling treacherous riverrapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. TheBabylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practisedby early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay thelender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen orlost at sea.Achaemenian monarchs of Ancient Persia were the first to insure their people and made it official by registering theinsuring process in governmental notary offices. The insurance tradition was performed each year in Norouz(beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part,presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift wasworth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This wasadvantageous to those who presented such special gifts. For others, the presents were fairly assessed by theconfidants of the court. Then the assessment was registered in special offices.The purpose of registering was that whenever the person who presented the gift registered by the court was introuble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books onancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, havehis children married, etc. the one in charge of this in the court would check the registration. If the registered amountexceeded 10,000 Derrik, he or she would receive an amount of twice as much."[12]A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whosegoods were being shipped together would pay a proportionally divided premium which would be used to reimburseany merchant whose goods were jettisoned during storm or sinkage.The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guildscalled "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guildsin the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Beforeinsurance was established in the late 17th century, "friendly societies" existed in England, in which people donatedamounts of money to a general sum that could be used for emergencies.Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful

Insurance 37

in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varietiesdeveloped.Some forms of insurance had developed in London by the early decades of the seventeenth century. For example, thewill of the English colonist Robert Hayman mentions two "policies of insurance" taken out with the diocesanChancellor of London, Arthur Duck. Of the value of £100 each, one relates to the safe arrival of Hayman's ship inGuyana and the other is in regard to "one hundred pounds assured by the said Doctor Arthur Ducke on my life".Hayman's will was signed and sealed on 17 November 1628 but not proved until 1633.[13] Toward the end of theseventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. Inthe late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, andships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for partieswishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of Londonremains the leading market (note that it is not an insurance company) for marine and other specialist types ofinsurance, but it works rather differently than the more familiar kinds of insurance.Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured more than 13,000houses. The devastating effects of the fire converted the development of insurance "from a matter of convenienceinto one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for 'the InsuranceOffice' in his new plan for London in 1667."[14] A number of attempted fire insurance schemes came to nothing, butin 1681 Nicholas Barbon, and eleven associates, established England's first fire insurance company, the 'InsuranceOffice for Houses', at the back of the Royal Exchange. Initially, 5,000 homes were insured by Barbon's InsuranceOffice.[15]

The first insurance company in the United States underwrote fire insurance and was formed in Charles Town(modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard thepractice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded thePhiladelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first tomake contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused toinsure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States,regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual stateinsurance departments. Whereas insurance markets have become centralized nationally and internationally, stateinsurance commissioners operate individually, though at times in concert through a national insurancecommissioners' organization. In recent years, some have called for a dual state and federal regulatory system(commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banksand national banks.

Types of insuranceAny risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims areknown as "perils". An insurance policy will set out in detail which perils are covered by the policy and which arenot. Below are (non-exhaustive) lists of the many different types of insurance that exist. A single policy may coverrisks in one or more of the categories set out below. For example, auto insurance would typically cover both propertyrisk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing anaccident). A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to thehome and the owner's belongings, liability insurance covering certain legal claims against the owner, and even asmall amount of coverage for medical expenses of guests who are injured on the owner's property.Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners

Insurance 38

insurance bundles the coverages that a homeowner needs.[16]

Auto insurance

A wrecked vehicle

Auto insurance protects you against financial loss if you have anaccident. It is a contract between the insured and the insurancecompany. You agree to pay the premium and the insurance companyagrees to pay losses as defined in the policy. Auto insurance providesproperty, liability and medical coverage:1. Property coverage pays for damage to or theft of the car.2. Liability coverage pays for the legal responsibility to others for

bodily injury or property damage.3. Medical coverage pays for the cost of treating injuries,

rehabilitation and sometimes lost wages and funeral expenses.An auto insurance policy comprises six kinds of coverage. Most countries require you to buy some, but not all, ofthese coverages. If you're financing a car, the lender may also have requirements. Most auto policies are for sixmonths to a year.In the United States, the insurance company should notify you by mail when it’s time to renew the policy and to paythe premium.[17]

Home insuranceHome insurance provides compensation for damage or destruction of a home from disasters. In some geographicalareas, the standard insurances exclude certain types of disasters, such as flood and earthquakes, that requireadditional coverage. Maintenance-related problems are the homeowners' responsibility. The policy may includeinventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries,insurers offer a package which may include liability and legal responsibility for injuries and property damage causedby members of the household, including pets.[18]

Health

NHS Facility

Health insurance policies by the National Health Service in the UnitedKingdom (NHS) or other publicly-funded health programs will coverthe cost of medical treatments. Dental insurance, like medicalinsurance, is coverage for individuals to protect them against dentalcosts. In the U.S., dental insurance is often part of an employer'sbenefits package, along with health insurance.

Accident, Sickness and Unemployment Insurance

• Disability insurance policies provide financial support in the eventthe policyholder is unable to work because of disabling illness orinjury. It provides monthly support to help pay such obligations as mortgage loans and credit cards.

• Disability overhead insurance allows business owners to cover the overhead expenses of their business while theyare unable to work.

• Total permanent disability insurance provides benefits when a person is permanently disabled and can no longerwork in their profession, often taken as an adjunct to life insurance.

• Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medicalexpenses incurred because of a job-related injury.

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CasualtyCasualty insurance insures against accidents, not necessarily tied to any specific property.• Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the

criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising fromtheft or embezzlement.

• Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations incountries in which there is a risk that revolution or other political conditions will result in a loss.

LifeLife insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and mayspecifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurancepolicies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment oran annuity.Annuities provide a stream of payments and are generally classified as insurance because they are issued byinsurance companies and regulated as insurance and require the same kinds of actuarial and investment managementexpertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded asinsurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are thecomplement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy issurrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, arefinancial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the U.S. and the UK, the tax law provides that the interest on this cash value is not taxableunder certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving aswell as protection in the event of early death.In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in somecases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company,the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles(e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.

Property

This tornado damage to an Illinois home wouldbe considered an "Act of God" for insurance

purposes

Property insurance provides protection against risks to property, suchas fire, theft or weather damage. This includes specialized forms ofinsurance such as fire insurance, flood insurance, earthquake insurance,home insurance, inland marine insurance or boiler insurance.

• Automobile insurance, known in the UK as motor insurance, isprobably the most common form of insurance and may cover bothlegal liability claims against the driver and loss of or damage to theinsured's vehicle itself. Throughout the United States an autoinsurance policy is required to legally operate a motor vehicle onpublic roads. In some jurisdictions, bodily injury compensation forautomobile accident victims has been changed to a no-fault system,which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits.Credit card companies insure against damage on rented cars.

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• Driving School Insurance provides cover for any authorized driver whilst undergoing tuition, cover also unlikeother motor policies provides cover for instructor liability where both the pupil and driving instructor areequally liable in the event of a claim.

• Aviation insurance insures against hull, spares, deductibles, hull wear and liability risks.• Boiler insurance (also known as boiler and machinery insurance or equipment breakdown insurance) insures

against accidental physical damage to equipment or machinery.• Builder's risk insurance insures against the risk of physical loss or damage to property during construction.

Builder's risk insurance is typically written on an "all risk" basis covering damage due to any cause (including thenegligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects aperson's or organization's insurable interest in materials, fixtures and/or equipment being used in the constructionor renovation of a building or structure should those items sustain physical loss or damage from a coveredcause.[19]

• Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with growing crops.Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease, forinstance."[20]

• Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake thatcauses damage to the property. Most ordinary homeowners insurance policies do not cover earthquake damage.Most earthquake insurance policies feature a high deductible. Rates depend on location and the probability of anearthquake, as well as the construction of the home.

• A fidelity bond is a form of casualty insurance that covers policyholders for losses that they incur as a result offraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of itsemployees.

• Flood insurance protects against property loss due to flooding. Many insurers in the U.S. do not provide floodinsurance in some portions of the country. In response to this, the federal government created the National FloodInsurance Program which serves as the insurer of last resort.

• Home insurance, also commonly called hazard insurance or homeowners insurance (often abbreviated in the realestate industry as HOI), is the type of property insurance that covers private homes.

• Landlord insurance covers residential and commercial properties which are rented to others. Most homeowner'sinsurance covers only owner-occupied homes.

• Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways,and of cargo in transit, regardless of the method of transit. When the owner of the cargo and the carrier areseparate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained fromfire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Manymarine insurance underwriters will include "time element" coverage in such policies, which extends the indemnityto cover loss of profit and other business expenses attributable to the delay caused by a covered loss.

• Surety bond insurance is a three party insurance guaranteeing the performance of the principal.• Terrorism insurance provides protection against any loss or damage caused by terrorist activities.• Volcano insurance is an insurance that covers volcano damage in Hawaii.• Windstorm insurance is an insurance covering the damage that can be caused by hurricanes and tropical cyclones.

LiabilityLiability insurance is a very broad superset that covers legal claims against the insured. Many types of insuranceinclude an aspect of liability coverage. For example, a homeowner's insurance policy will normally include liabilitycoverage which protects the insured in the event of a claim brought by someone who slips and falls on the property;automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashingcar can cause to others' lives, health, or property. The protection offered by a liability insurance policy is twofold: alegal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf

Insurance 41

of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence ofthe insured, and will not apply to results of wilful or intentional acts by the insured.• Public liability insurance covers a business against claims should its operations injure a member of the public or

damage their property in some way.• Directors and officers liability insurance protects an organization (usually a corporation) from costs associated

with litigation resulting from mistakes made by directors and officers for which they are liable. In the industry, itis usually called "D&O" for short.

• Environmental liability insurance protects the insured from bodily injury, property damage and cleanup costs as aresult of the dispersal, release or escape of pollutants.

• Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance".• Prize indemnity insurance protects the insured from giving away a large prize at a specific event. Examples would

include offering prizes to contestants who can make a half-court shot at a basketball game, or a hole-in-one at agolf tournament.

• Professional liability insurance, also called professional indemnity insurance, protects insured professionals suchas architectural corporation and medical practice against potential negligence claims made by theirpatients/clients. Professional liability insurance may take on different names depending on the profession. Forexample, professional liability insurance in reference to the medical profession may be called malpracticeinsurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&Opolicyholders include, for example, real estate brokers, Insurance agents, home inspectors, appraisers, and websitedevelopers.

CreditCredit insurance repays some or all of a loan when certain things happen to the borrower such as unemployment,disability, or death.• Mortgage insurance insures the lender against default by the borrower. Mortgage insurance is a form of credit

insurance, although the name credit insurance more often is used to refer to policies that cover other kinds ofdebt.

• Many credit cards offer payment protection plans which are a form of credit insurance.

Other types• Collateral protection insurance or CPI, insures property (primarily vehicles) held as collateral for loans made by

lending institutions.• Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilian workers hired by the

government to perform contracts outside the U.S. and Canada. DBA is required for all U.S. citizens, U.S.residents, U.S. Green Card holders, and all employees or subcontractors hired on overseas government contracts.Depending on the country, Foreign Nationals must also be covered under DBA. This coverage typically includesexpenses related to medical treatment and loss of wages, as well as disability and death benefits.

• Expatriate insurance provides individuals and organizations operating outside of their home country withprotection for automobiles, property, health, liability and business pursuits.

• Financial loss insurance or Business Interruption Insurance protects individuals and companies against variousfinancial risks. For example, a business might purchase coverage to protect it from loss of sales if a fire in afactory prevented it from carrying out its business for a time. Insurance might also cover the failure of a creditorto pay money it owes to the insured. This type of insurance is frequently referred to as "business interruptioninsurance." Fidelity bonds and surety bonds are included in this category, although these products provide abenefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fails toperform its obligations under a contract with the obligee.

Insurance 42

• Kidnap and ransom insurance• Legal Expenses Insurance covers policyholders against the potential costs of legal action against an institution or

an individual.• Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and banks. It is

used to protect public funds from tamper by unauthorized parties. In special cases, a government may authorizeits use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usuallyvery strict. Therefore it is used only in extreme cases where maximum security of funds is required.

• Media Insurance is designed to cover professionals that engage in film, video and TV production.• Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is

generally arranged at the national level. See the Nuclear exclusion clause and for the United States thePrice-Anderson Nuclear Industries Indemnity Act)

• Pet insurance insures pets against accidents and illnesses - some companies cover routine/wellness care andburial, as well.

• Pollution Insurance which consists of first-party coverage for contamination of insured property either by externalor on-site sources. Coverage for liability to third parties arising from contamination of air, water, or land due tothe sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costsof cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specificallyexcluded.

• Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance cancover individual purchase protection, warranties, guarantees, care plans and even mobile phone insurance. Suchinsurance is normally very limited in the scope of problems that are covered by the policy.

• Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, freeand clear of liens or encumbrances. It is usually issued in conjunction with a search of the public recordsperformed at the time of a real estate transaction.

• Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such asmedical expenses, loss of personal belongings, travel delay, personal liabilities, etc.

Insurance financing vehicles• Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social

organizations.[21]

• No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds are indemnifiedby their own insurer regardless of fault in the incident.

• Protected Self-Insurance is an alternative risk financing mechanism in which an organization retains themathematically calculated cost of risk within the organization and transfers the catastrophic risk with specific andaggregate limits to an insurer so the maximum total cost of the program is known. A properly designed andunderwritten Protected Self-Insurance Program reduces and stabilizes the cost of insurance and provides valuablerisk management information.

• Retrospectively Rated Insurance is a method of establishing a premium on large commercial accounts. The finalpremium is based on the insured's actual loss experience during the policy term, sometimes subject to a minimumand maximum premium, with the final premium determined by a formula. Under this plan, the current year'spremium is based partially (or wholly) on the current year's losses, although the premium adjustments may takemonths or years beyond the current year's expiration date. The rating formula is guaranteed in the insurancecontract. Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerousvariations of this formula have been developed and are in use.

• Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usually used

Insurance 43

to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having topay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books,acquisition expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequentlosses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords.

• Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect againstunexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital managementrather than to transfer insurance risk.

• Social insurance can be many things to many people in many countries. But a summary of its essence is that it is acollection of insurance coverages (including components of life insurance, disability income insurance,unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by allcitizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone canbecome a claimant when or if he/she needs to. Along the way this inevitably becomes related to other conceptssuch as the justice system and the welfare state. This is a large, complicated topic that engenders tremendousdebate, which can be further studied in the following articles (and others):• National Insurance• Social safety net• Social security• Social Security debate (United States)• Social Security (United States)• Social welfare provision

• Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is purchased byorganizations who do not want to assume 100% of the liability for losses arising from the plans. Under a stop-losspolicy, the insurance company becomes liable for losses that exceed certain limits called deductibles.

Closed community self-insuranceSome communities prefer to create virtual insurance amongst themselves by other means than contractual risktransfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish andsome Muslim groups, depend on support provided by their communities when disasters strike. The risk presented byany given person is assumed collectively by the community who all bear the cost of rebuilding lost property andsupporting people whose needs are suddenly greater after a loss of some kind. In supportive communities whereothers can be trusted to follow community leaders, this tacit form of insurance can work. In this manner thecommunity can even out the extreme differences in insurability that exist among its members. Some furtherjustification is also provided by invoking the moral hazard of explicit insurance contracts.In the United Kingdom, The Crown (which, for practical purposes, meant the Civil service) did not insure propertysuch as government buildings. If a government building was damaged, the cost of repair would be met from publicfunds because, in the long run, this was cheaper than paying insurance premiums. Since many UK governmentbuildings have been sold to property companies, and rented back, this arrangement is now less common and mayhave disappeared altogether.

Insurance 44

Insurance companiesInsurance companies may be classified into two groups:• Life insurance companies, which sell life insurance, annuities and pensions products.• Non-life, General, or Property/Casualty insurance companies, which sell other types of insurance.General insurance companies can be further divided into these sub categories.• Standard Lines• Excess LinesIn most countries, life and non-life insurers are subject to different regulatory regimes and different tax andaccounting rules. The main reason for the distinction between the two types of company is that life, annuity, andpension business is very long-term in nature — coverage for life assurance or a pension can cover risks over manydecades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.In the United States, standard line insurance companies are "mainstream" insurers. These are the companies thattypically insure autos, homes or businesses. They use pattern or "cookie-cutter" policies without variation from oneperson to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They areregulated by state laws that can restrict the amount they can charge for insurance policies.Excess line insurance companies (also known as Excess and Surplus) typically insure risks not covered by thestandard lines market. They are broadly referred as being all insurance placed with non-admitted insurers.Non-admitted insurers are not licensed in the states where the risks are located. These companies have moreflexibility and can react faster than standard insurance companies because they are not required to file rates andforms as the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them.State laws generally require insurance placed with surplus line agents and brokers not to be available throughstandard licensed insurers.Insurance companies are generally classified as either mutual or stock companies. Mutual companies are owned bythe policyholders, while stockholders (who may or may not own policies) own stock insurance companies.Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutualholding company, became common in some countries, such as the United States, in the late 20th century.Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharingrisks, and Lloyd's organizations.Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financialstrength, which measures its ability to pay claims. It also rates financial instruments issued by the insurancecompany, such as bonds, notes, and securitization products.Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them toreduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few verylarge companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.Captive insurance companies may be defined as limited-purpose insurance companies established with the specificobjective of financing risks emanating from their parent group or groups. This definition can sometimes be extendedto include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle.Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a"mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive(which self-insures individual risks of the members of a professional, commercial or industrial association). Captivesrepresent commercial, economic and tax advantages to their sponsors because of the reductions in costs they helpcreate and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally,they may provide coverage of risks which is neither available nor offered in the traditional insurance market atreasonable prices.

Insurance 45

The types of risk that a captive can underwrite for their parents include property damage, public and productliability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. Thecaptive's exposure to such risks may be limited by the use of reinsurance.Captives are becoming an increasingly important component of the risk management and risk financing strategy oftheir parent. This can be understood against the following background:• heavy and increasing premium costs in almost every line of coverage;• difficulties in insuring certain types of fortuitous risk;• differential coverage standards in various parts of the world;• rating structures which reflect market trends rather than individual loss experience;• insufficient credit for deductibles and/or loss control efforts.There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a feeby the customer to shop around for the best insurance policy amongst many companies. Similar to an insuranceconsultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However,with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather thandirectly from the client.Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them ininsurance transactions. Third party administrators are companies that perform underwriting and sometimes claimshandling services for insurance companies. These companies often have special expertise that the insurancecompanies do not have.The financial stability and strength of an insurance company should be a major consideration when buying aninsurance contract. An insurance premium paid currently provides coverage for losses that might arise many years inthe future. For that reason, the viability of the insurance carrier is very important. In recent years, a number ofinsurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from agovernment-backed insurance pool or other arrangement with less attractive payouts for losses). A number ofindependent rating agencies provide information and rate the financial viability of insurance companies.

Global insurance industry

Life insurance premia written in 2005

Non-life insurance premia written in 2005

Global insurance premiums grew by 3.4% in 2008 to reach $4.3trillion. For the first time in the past three decades, premium incomedeclined in inflation-adjusted terms, with non-life premiums falling by0.8% and life premiums falling by 3.5%. The insurance industry isexposed to the global economic downturn on the assets side by thedecline in returns on investments and on the liabilities side by a rise inclaims. So far the extent of losses on both sides has been limitedalthough investment returns fell sharply following the bankruptcy ofLehman Brothers and bailout of AIG in September 2008. The financialcrisis has shown that the insurance sector is sufficiently capitalised.The vast majority of insurance companies had enough capital to absorblosses and only a small number turned to government for support.Advanced economies account for the bulk of global insurance. Withpremium income of $1,753bn, Europe was the most important regionin 2008, followed by North America $1,346bn and Asia $933bn. Thetop four countries generated more than a half of premiums. The US and Japan alone accounted for 40% of world

insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums. Their markets are however growing at a quicker

Insurance 46

pace.[22]

Controversies

Religious concernsMuslim scholars have varying opinions about insurance. Insurance policies that earn interest are generallyconsidered to be a form of riba[23] (usury) and some consider even policies that do not earn interest to be a form ofgharar (speculation). Some argue that gharar is not present due to the actuarial science behind the underwriting.[24]

Jewish rabbinical scholars also have expressed reservations regarding insurance as an avoidance of God's will butmost find it acceptable in moderation.[25]

Some Christians believe insurance represents a lack of faith[26] and there is a long history of resistance tocommercial insurance in Anabaptist communities (Mennonites, Amish, Hutterites, Brethren in Christ) but manyparticipate in community-based self-insurance programs that spread risk within their communities.[27] [28] [29]

Insurance insulates too muchBy creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds maynot be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to theinsurer), a concept known as moral hazard. To reduce their own financial exposure, insurance companies havecontractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grosslymagnifies their risk of loss or liability.For example, life insurance companies may require higher premiums or deny coverage altogether to people whowork in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coveragefor liability arising from intentional torts committed by or at the direction of the insured. Even if a provider were soirrational as to want to provide such coverage, it is against the public policy of most countries to allow suchinsurance to exist, and thus it is usually illegal.

Complexity of insurance policy contractsInsurance policies can be complex and some policyholders may not understand all the fees and coverages included ina policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries haveenacted detailed statutory and regulatory regimes governing every aspect of the insurance business, includingminimum standards for policies and the ways in which they may be advertised and sold.For example, most insurance policies in the English language today have been carefully drafted in plain English; theindustry learned the hard way that many courts will not enforce policies against insureds when the judges themselvescannot understand what the policies are saying.Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface it appearsthe broker represents the buyer (not the insurance company), and typically counsels the buyer on appropriatecoverage and policy limitations, it should be noted that in the vast majority of cases a broker's compensation comesin the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that thebroker's financial interest is tilted towards encouraging an insured to purchase more insurance than might benecessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to"shop" the market for the best rates and coverage possible.Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agentrepresents the insurance company from whom the policyholder buys. An agent can represent more than onecompany.

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An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thusoffers completely independent advice, free of the financial conflict of interest of brokers and/or agents. However,such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.

RedliningRedlining is the practice of denying insurance coverage in specific geographic areas, supposedly because of a highlikelihood of loss, while the alleged motivation is unlawful discrimination. Racial profiling or redlining has a longhistory in the property insurance industry in the United States. From a review of industry underwriting andmarketing materials, court documents, and research by government agencies, industry and community groups, andacademics, it is clear that race has long affected and continues to affect the policies and practices of the insuranceindustry.[30]

In July, 2007, The Federal Trade Commission released a report presenting the results of a study concerningcredit-based insurance scores and automobile insurance. The study found that these scores are effective predictors ofthe claims that consumers will file. [31]All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfairdiscrimination, often called redlining, in setting rates and making insurance available.[32]

In determining premiums and premium rate structures, insurers consider quantifiable factors, including location,credit scores, gender, occupation, marital status, and education level. However, the use of such factors is oftenconsidered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances ledto political disputes about the ways in which insurers determine premiums and regulatory intervention to limit thefactors used.An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor thatcauses a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurancemust be followed if insurance companies are to remain solvent. Thus, "discrimination" against (i.e., negativedifferential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessaryby-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantlyhigher premiums than they charge younger people for term life insurance. Older people are thus treated differentlythan younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatmentgoes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk ofloss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher tocover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing sois unlawful discrimination.What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means thatan insufficient amount is being charged for a given risk, and there is thus a deficit in the system. The failure toaddress the deficit may mean insolvency and hardship for all of a company's insureds. The options for addressing thedeficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e.,externalize outside of the company to society at large).

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Insurance patentsNew assurance products can now be protected from copying with a business method patent in the United States.A recent example of a new insurance product that is patented is Usage Based auto insurance. Early versions wereindependently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance (U.S.Patent 5797134 [33]) and a Spanish independent inventor, Salvador Minguijon Perez ( EP patent 0700009 [34]).Many independent inventors are in favor of patenting new insurance products since it gives them protection from bigcompanies when they bring their new insurance products to market. Independent inventors account for 70% of thenew U.S. patent applications in this area.Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. TheHartford insurance company, for example, recently had to pay $80 million to an independent inventor, BancorpServices, in order to settle a patent infringement and theft of trade secret lawsuit for a type of corporate owned lifeinsurance product invented and patented by Bancorp.There are currently about 150 new patent applications on insurance inventions filed per year in the United States.The rate at which patents have issued has steadily risen from 15 in 2002 to 44 in 2006.[35]

Inventors can now have their insurance U.S. patent applications reviewed by the public in the Peer to Patentprogram.[36] The first insurance patent application to be posted was US2009005522 “Risk assessment company” [37].It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changinginsurance companies.[38]

The insurance industry and rent seekingCertain insurance products and practices have been described as rent seeking by critics. That is, some insuranceproducts or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providingprotection against risks of adverse events. Under United States tax law, for example, most owners of variableannuities and variable life insurance can invest their premium payments in the stock market and defer or eliminatepaying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reasonpeople use these products. Another example is the legal infrastructure which allows life insurance to be held in anirrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.

See also• ACORD• Earthquake loss• Financial services (broader industry to which insurance belongs)• Five for One• Geneva Association, The (the International Association for the Study of Insurance Economics)• Global assets under management• Insurance fraud• Insurance Hall of Fame• Insurance law• Insurance Premium Tax (UK)• Intergovernmental Risk Pool• The Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know (book)• List of finance topics• List of insurance topics• List of United States insurance companies• Social security

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• Uberrima fides• Universal health care• Welfare stateCountry Specific Articles

• Insurance in Australia• Insurance in India• Insurance in the United States• Insurance in the United Kingdom

Bibliography• Dickson, P.G.M. (1960). The Sun Insurance Office 1710-1960: The History of Two and a half Centuries of British

Insurance. London: Oxford University Press. pp. 324.

External links• Congressional Research Service (CRS) Reports regarding the U.S. Insurance industry [39]

• Federation of European Risk Management Associations [40]

• Insurance [41] at the Open Directory Project• Insurance Bureau of Canada [42]

• Insurance Information Institute [43]

• Museum of Insurance [44] - displays thousands of antique insurance policies and ephemera• National Association of Insurance Commissioners [45]

• The British Library [46] - finding information on the insurance industry (UK bias)

References[1] Gollier C. (2003). To Insure or Not to Insure?: An Insurance Puzzle (http:/ / dhenriet. perso. egim-mrs. fr/ gollier. pdf). The Geneva Papers

on Risk and Insurance Theory.[2] This discussion is adapted from Mehr and Camack “Principles of Insurance”, 6th edition, 1976, pp 34 – 37.[3] Irish Brokers Association. Insurance Principles (https:/ / www. iba. ie/ development2009/ index. php?option=com_content& view=article&

id=76& Itemid=167).[4] C. Kulp & J. Hall, Casualty Insurance, Fourth Edition, 1968, page 35[5] However, bankruptcy of the insured does not relieve the insurer. Certain types of insurance, e.g., workers' compensation and personal

automobile, are subject to statutory requirements that injured parties have direct access to coverage.[6] Dembe AE, Boden LI. (2000). Moral hazard: A question of morality? (http:/ / baywood. metapress. com/ index/ 1GU8EQN802J62RXK. pdf).

New Solutions.[7] Kunreuther H. (1996). Mitigating Disaster Losses Through Insurance (http:/ / opim. wharton. upenn. edu/ risk/ downloads/ archive/ arch167.

pdf). Journal of Risk and Uncertainty.[8] Feldstein, Sylvan G.; Fabozzi, Frank J. (2008). The Handbook of Municipal Bonds (http:/ / books. google. com/ books?id=Juc4fb1Fx1cC&

lpg=PA614& ots=IryMrWB21p& pg=PA614#v=onepage& f=false). Wiley. p. 614. ISBN 978-0470108758. . Retrieved February 8, 2010.[9] http:/ / www. abi. org. uk/ About_The_ABI/ role. aspx[10] Fitzpatrick, Sean, Fear is the Key: A Behavioral Guide to Underwriting Cycles, (http:/ / ssrn. com/ abstract=690316) 10 Conn. Ins. L.J. 255

(2004).[11] See, e.g., Vaughan, E. J., 1997, Risk Management, New York: Wiley.[12] http:/ / www. iran-law. com/ article. php3?id_article=61[13] "And whereas I have left in the hands of Doctor Ducke Channcellor of London two pollicies of insurance the one of one hundred pounds for

the safe arivall of our Shipp in Guiana which is in mine owne name, if we miscarry by the waie (which God forbid) I bequeath the advantagethereof to my said Cosin Thomas Muchell...whereas there is an other insurance of one hundred pounds assured by the said Doctor ArthurDucke on my life for one yeare if I chance to die within that tyme I entreat the said doctor Ducke to make it over to the said Thomas Muchellhis kinsman..." Will of Robert Hayman, 1628:Records of the Prerogative Court of Canterbury, Catalogue Reference PROB 11/163

[14] Dickson (1960): 4[15] Dickson (1960): 7

Insurance 50

[16] Insurance Information Institute. "Business insurance information. What does a businessowners policy cover?" (http:/ / www. iii. org/individuals/ business/ basics/ bop/ ). . Retrieved 2007-05-09.

[17] Insurance Information Institute. "What is auto insurance?" (http:/ / www. iii. org/ individuals/ auto/ a/ whatis/ ). . Retrieved 2008-11-11.[18] Insurance Information Institute. "What is homeowners insurance?" (http:/ / www. iii. org/ individuals/ homei/ hbasics/ whatis/ ). . Retrieved

2008-11-11.[19] "Builder's Risk Insurance" (http:/ / www. adjustersinternational. com/ AdjustingToday/ ATfullinfo. cfm?start=1& page_no=1& pdfID=4).

Adjusters International. . Retrieved 2009-10-16.[20] U.S. Patent Application 20060287896 (http:/ / appft1. uspto. gov/ netacgi/ nph-Parser?Sect1=PTO2& Sect2=HITOFF& p=1& u=/ netahtml/

PTO/ search-bool. html& r=1& f=G& l=50& co1=AND& d=PG01& s1=20060287896& OS=20060287896& RS=20060287896) (http:/ /www. pat2pdf. org/ pat2pdf/ foo. pl?number=20060287896) “Method for providing crop insurance for a crop associated with a definedattribute”

[21] Margaret E. Lynch, Editor, "Health Insurance Terminology," Health Insurance Association of America, 1992, ISBN 1-879143-13-5[22] http:/ / www. thecityuk. com/ media/ 2377/ Insurance_2009. pdfPDF (365 KB) page 2[23] "Islam Question and Answer - The true nature of insurance and the rulings concerning it" (http:/ / islamqa. com/ en/ ref/ 8889/ insurance). .

Retrieved 2010-01-18.[24] "Life Insurance from an Islamic Perspective" (http:/ / www. islamonline. net/ servlet/

Satellite?pagename=IslamOnline-English-Ask_Scholar/ FatwaE/ FatwaE& cid=1119503543412). . Retrieved 2010-01-18.[25] "Jewish Association for Business Ethics - Insurance" (http:/ / www. jabe. org/ insurance. html). . Retrieved 2008-03-25.[26] "CIC Insurance - Insurance and the Church" (http:/ / www. cic. co. ke/ template/ t02. php?menuId=72). . Retrieved 2010-01-18.[27] Rubinkam, Michael (October 5, 2006). "Amish Reluctantly Accept Donations" (http:/ / www. washingtonpost. com/ wp-dyn/ content/

article/ 2006/ 10/ 05/ AR2006100501360. html). The Washington Post. . Retrieved 2008-03-25.[28] Donald B. Kraybill. The riddle of Amish culture. p. 277.[29] "Global Anabaptist Mennonite Encyclopedia Online, Insurance" (http:/ / www. gameo. org/ encyclopedia/ contents/ I583ME. html). .

Retrieved 2010-01-18.[30] Gregory D. Squires (2003) Racial Profiling, Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas

Journal of Urban Affairs Volume 25 Issue 4 Page 391-410, November 2003[31] http:/ / www2. ftc. gov/ os/ 2007/ 07/ P044804FACTA_Report_Credit-Based_Insurance_Scores. pdf[32] Insurance Information Institute. "Issues Update: Regulation Modernization" (http:/ / www. iii. org/ media/ hottopics/ insurance/ ratereg/ ). .

Retrieved 2008-11-11.[33] http:/ / www. google. com/ patents?vid=5797134[34] http:/ / v3. espacenet. com/ textdoc?DB=EPODOC& IDX=EP0700009[35] (Source: Insurance IP Bulletin, December 15, 2006) (http:/ / marketsandpatents. com/ IPB-12152006. mht)[36] Mark Nowotarski "Patent Q/A: Peer to Patent", Insurance IP Bulletin, August 15, 2008 (http:/ / www. marketsandpatents. com/ bulletin/

IPB-08152008. html)[37] http:/ / www. peertopatent. org/ patent/ 20090055227/ activity[38] Bakos, Nowotarski, “An Experiment in Better Patent Examination”, Insurance IP Bulletin, December 15, 2008 (http:/ / www.

marketsandpatents. com/ bulletin/ IPB-12152008. html)[39] http:/ / digital. library. unt. edu/ govdocs/ crs/ search. tkl?type=subject& q=Insurance%20companies%20& q2=LIV[40] http:/ / www. ferma. eu/[41] http:/ / www. dmoz. org/ Home/ Personal_Finance/ Insurance/[42] http:/ / www. ibc. ca/[43] http:/ / www. iii. org/[44] http:/ / www. immediateannuities. com/ museumofinsurance/[45] http:/ / www. naic. org/[46] http:/ / www. bl. uk/ collections/ business/ insurind. html

51

Risk Management

DerivativeA derivative is an agreement or contract that is not based on a real, or true, exchange, i.e.: There is nothing tangiblelike money, or a product, that is being exchanged. For example, a person goes to the grocery store, exchanges acurrency (money) for a commodity (say, an apple). The exchange is complete, both parties have something tangible.If the purchaser had called the store and asked for the apple to be held for one hour while the purchaser drives to thestore, and the seller agrees, then a derivative has been created. The agreement (derivative) is derived from a proposedexchange (trade money for apple in one hour, not now).In financial terms, a derivative is a financial instrument - or more simply, an agreement between two people or twoparties - that has a value determined by the price of something else (called the underlying).[1] It is a financial contractwith a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency.There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since aderivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the realdefinition of a derivative is an agreement between two parties that is contingent on a future outcome of theunderlying.Referring to derivatives as assets would be a misconception, since a derivative is incapable of having value of itsown. However, some more commonplace derivatives, such as swaps, futures, and options, which have a theoreticalface value that can be calculated using formulas, such as Black-Scholes, are frequently traded on open marketsbefore their expiration date as if they were assets.

CategorizationDerivatives are usually broadly categorized by the:• relationship between the underlying and the derivative (e.g., forward, option, swap)• type of underlying (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity

derivatives or credit derivatives)• market in which they trade (e.g., exchange-traded or over-the-counter)• pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality)Another arbitrary distinction is between:[2]

• vanilla derivatives (simple and more common) and• exotic derivatives (more complicated and specialized)There is no definitive rule for distinguishing one from the other, so the distinction is mostly a matter of custom.

Derivative 52

UsesDerivatives are used by investors to• provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in

the value of the derivative• speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a

given direction, stays in or out of a specified range, reaches a certain level)• hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite

direction to their underlying position and cancels part or all of it out• obtain exposure to underlying where it is not possible to trade in the underlying (e.g., weather derivatives)• create optionability where the value of the derivative is linked to a specific condition or event (e.g., the underlying

reaching a specific price level)

HedgingHedging is a technique that attempts to reduce risk. In this respect, derivatives can be considered a form ofinsurance.Derivatives allow risk about the price of the underlying asset to be transferred from one party to another. Forexample, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for aspecified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertaintyof the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will beavailable because of events unspecified by the contract, like the weather, or that one party will renege on thecontract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insuredagainst counter-party risk.From another perspective, the farmer and the miller both reduce a risk and acquire a risk when they sign the futurescontract: The farmer reduces the risk that the price of wheat will fall below the price specified in the contract andacquires the risk that the price of wheat will rise above the price specified in the contract (thereby losing additionalincome that he could have earned). The miller, on the other hand, acquires the risk that the price of wheat will fallbelow the price specified in the contract (thereby paying more in the future than he otherwise would) and reduces therisk that the price of wheat will rise above the price specified in the contract. In this sense, one party is the insurer(risk taker) for one type of risk, and the counter-party is the insurer (risk taker) for another type of risk.Hedging also occurs when an individual or institution buys an asset (like a commodity, a bond that has couponpayments, a stock that pays dividends, and so on) and sells it using a futures contract. The individual or institutionhas access to the asset for a specified amount of time, and then can sell it in the future at a specified price accordingto the futures contract. Of course, this allows the individual or institution the benefit of holding the asset whilereducing the risk that the future selling price will deviate unexpectedly from the market's current assessment of thefuture value of the asset.

Derivative 53

Derivatives traders at the Chicago Board of Trade.

Derivatives serve a legitimate business purpose. Forexample, a corporation borrows a large sum of moneyat a specific interest rate.[3] The rate of interest on theloan resets every six months. The corporation isconcerned that the rate of interest may be much higherin six months. The corporation could buy a forward rateagreement (FRA). A forward rate agreement is acontract to pay a fixed rate of interest six months afterpurchases on a notional sum of money.[4] If the interestrate after six months is above the contract rate, theseller pays the difference to the corporation, or FRAbuyer. If the rate is lower, the corporation would paythe difference to the seller. The purchase of the FRAwould serve to reduce the uncertainty concerning therate increase and stabilize earnings.

Speculation and arbitrageDerivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus, some individuals andinstitutions will enter into a derivative contract to speculate on the value of the underlying asset, betting that theparty seeking insurance will be wrong about the future value of the underlying asset. Speculators will want to be ableto buy an asset in the future at a low price according to a derivative contract when the future market price is high, orto sell an asset in the future at a high price according to a derivative contract when the future market price is low.Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an assetfalls below the price specified in a futures contract to sell the asset.Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at BaringsBank, made poor and unauthorized investments in futures contracts. Through a combination of poor judgment, lackof oversight by the bank's management and by regulators, and unfortunate events like the Kobe earthquake, Leesonincurred a $1.3 billion loss that bankrupted the centuries-old institution.[5]

Types of derivatives

OTC and exchange-tradedIn broad terms, there are two distinct groups of derivative contracts, which are distinguished by the way they aretraded in the market:• Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between

two parties, without going through an exchange or other intermediary. Products such as swaps, forward rateagreements, and exotic options are almost always traded in this way. The OTC derivative market is the largestmarket for derivatives, and is largely unregulated with respect to disclosure of information between the parties,since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reportingof OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange.According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as ofJune 2008).[6] Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS),9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other.Because OTC derivatives are not traded on an exchange, there is no central counter-party. Therefore, they aresubject to counter-party risk, like an ordinary contract, since each counter-party relies on the other to perform.

Derivative 54

• Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specializedderivatives exchanges or other exchanges. A derivatives exchange is a market where individuals tradestandardized contracts that have been defined by the exchange.[7] A derivatives exchange acts as an intermediaryto all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world'slargest[8] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI IndexFutures & Options), Eurex (which lists a wide range of European products such as interest rate & index products),and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board ofTrade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnoverin the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. Some types of derivativeinstruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bondsand/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listedon equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of acomplex set of options bundled into a simple package are routinely listed on equity exchanges. Like otherderivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristicsthat, while related to an underlying commodity, nonetheless are distinctive.

Common derivative contract typesThere are three major classes of derivatives:1. Futures/Forwards are contracts to buy or sell an asset on or before a future date at a price specified today. A

futures contract differs from a forward contract in that the futures contract is a standardized contract written by aclearing house that operates an exchange where the contract can be bought and sold, whereas a forward contract isa non-standardized contract written by the parties themselves.

2. Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) orsell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, andis specified at the time the parties enter into the option. The option contract also specifies a maturity date. In thecase of a European option, the owner has the right to require the sale to take place on (but not before) the maturitydate; in the case of an American option, the owner can require the sale to take place at any time up to the maturitydate. If the owner of the contract exercises this right, the counter-party has the obligation to carry out thetransaction.

3. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying valueof currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets.

More complex derivatives can be created by combining the elements of these basic types. For example, the holder ofa swaption has the right, but not the obligation, to enter into a swap on or before a specified future date.

ExamplesThe overall derivatives market has five major classes of underlying asset:• interest rate derivatives (the largest)• foreign exchange derivatives• credit derivatives• equity derivatives• commodity derivativesSome common examples of these derivatives are:

Derivative 55

UNDERLYING CONTRACT TYPES

Exchange-tradedfutures

Exchange-traded options OTC swap OTC forward OTC option

Equity DJIA Index futureSingle-stock future

Option on DJIA IndexfutureSingle-share option

Equity swap Back-to-backRepurchase agreement

Stock optionWarrantTurbo warrant

Interest rate Eurodollar futureEuribor future

Option on EurodollarfutureOption on Euribor future

Interest rate swap Forward rate agreement Interest rate cap andfloorSwaptionBasis swapBond option

Credit Bond future Option on Bond future Credit defaultswapTotal return swap

Repurchase agreement Credit default option

Foreignexchange

Currency future Option on currency future Currency swap Currency forward Currency option

Commodity WTI crude oil futures Weather derivatives Commodity swap Iron ore forwardcontract

Gold option

Other examples of underlying exchangeables are:• Property (mortgage) derivatives• Economic derivatives that pay off according to economic reports[9] as measured and reported by national

statistical agencies• Freight derivatives• Inflation derivatives• Weather derivatives• Insurance derivatives• Emissions derivatives[10]

Valuation

Total world derivatives from 1998-2007[11] compared to total world wealth in the year2000[12]

Market and arbitrage-freeprices

Two common measures of value are:• Market price, i.e. the price at which

traders are willing to buy or sell thecontract

• Arbitrage-free price, meaning thatno risk-free profits can be made bytrading in these contracts; seerational pricing

Derivative 56

Determining the market priceFor exchange-traded derivatives, market price is usually transparent (often published in real time by the exchange,based on all the current bids and offers placed on that particular contract at any one time). Complications can arisewith OTC or floor-traded contracts though, as trading is handled manually, making it difficult to automaticallybroadcast prices. In particular with OTC contracts, there is no central exchange to collate and disseminate prices.

Determining the arbitrage-free priceThe arbitrage-free price for a derivatives contract is complex, and there are many different variables to consider.Arbitrage-free pricing is a central topic of financial mathematics. The stochastic process of the price of theunderlying asset is often crucial. A key equation for the theoretical valuation of options is the Black–Scholesformula, which is based on the assumption that the cash flows from a European stock option can be replicated by acontinuous buying and selling strategy using only the stock. A simplified version of this valuation technique is thebinomial options model.

CriticismDerivatives are often subject to the following criticisms:

Possible large lossesThe use of derivatives can result in large losses because of the use of leverage, or borrowing. Derivatives allowinvestors to earn large returns from small movements in the underlying asset's price. However, investors could loselarge amounts if the price of the underlying moves against them significantly. There have been several instances ofmassive losses in derivative markets, such as:

• The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by theUS federal government.[13] An AIG subsidiary had lost more than $18 billion over the preceding three quarterson Credit Default Swaps (CDS) it had written.[14] It was reported that the recapitalization was necessarybecause further losses were foreseeable over the next few quarters.

• The loss of $7.2 Billion by Société Générale in January 2008 through mis-use of futures contracts.• The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September

2006 when the price plummeted.• The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998.• The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On

December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. Thecounty lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent atthe time; however, because of the strategy the county employed, it was unable to generate the cash flowsneeded to maintain services. Orange County is a good example of what happens when derivatives are usedincorrectly and positions liquidated in an unplanned manner; had they not liquidated, they would not have lostany money as their positions rebounded. Potentially problematic use of interest-rate derivatives by USmunicipalities has continued in recent years. See, for example:[15]

• The Nick Leeson affair in 1994.Members of President Clinton's Working Group on Financial Markets: Larry Summers, Alan Greenspan, ArthurLevitt, and Robert Rubin, have been criticized for torpedoing an effort to regulate the derivatives' markets, andthereby helping to bring down the financial markets in Fall 2008. President George W. Bush has also been criticizedbecause he was President for 8 years preceding the 2008 meltdown and did nothing to regulate derivative trading.Bush has stated that deregulation was one of the core tenets of his political philosophy.

Derivative 57

Counter-party riskSome derivatives (especially swaps) expose investors to counter-party risk.For example, suppose a person wanting a fixed interest rate loan for his business, but finding that banks only offervariable rates, swaps payments with another business who wants a variable rate, synthetically creating a fixed ratefor the person. However if the second business goes bankrupt, it can't pay its variable rate and so the first businesswill lose its fixed rate and will be paying a variable rate again. If interest rates have increased, it is possible that thefirst business may be adversely affected, because it may not be prepared to pay the higher variable rate.Different types of derivatives have different levels of counter-party risk. For example, standardized stock options bylaw require the party at risk to have a certain amount deposited with the exchange, showing that they can pay for anylosses; banks that help businesses swap variable for fixed rates on loans may do credit checks on both parties.However, in private agreements between two companies, for example, there may not be benchmarks for performingdue diligence and risk analysis.

Large notional valueDerivatives typically have a large notional value. As such, there is the danger that their use could result in lossesthat the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuingin an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway's 2002 annualreport. Buffett called them 'financial weapons of mass destruction.' The problem with derivatives is that they controlan increasingly larger notional amount of assets and this may lead to distortions in the real capital and equitiesmarkets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so whatwas originally meant to be a market to transfer risk now becomes a leading indicator. (See Berkshire HathawayAnnual Report for 2002) [16]

Leverage of an economy's debtDerivatives massively leverage the debt in an economy, making it ever more difficult for the underlying realeconomy to service its debt obligations, thereby curtailing real economic activity, which can cause a recession oreven depression. In the view of Marriner S. Eccles, U.S. Federal Reserve Chairman from November, 1934 toFebruary, 1948, too high a level of debt was one of the primary causes of the 1920s-30s Great Depression. (SeeBerkshire Hathaway Annual Report for 2002)

BenefitsThe use of derivatives also has its benefits:• Derivatives facilitate the buying and selling of risk, and many people consider this to have a positive impact on

the economic system. Although someone loses money while someone else gains money with a derivative, undernormal circumstances, trading in derivatives should not adversely affect the economic system because it is notzero sum in utility.

• Former Federal Reserve Board chairman Alan Greenspan commented in 2003 that he believed that the use ofderivatives has softened the impact of the economic downturn at the beginning of the 21st century.

Derivative 58

Definitions• Bilateral netting: A legally enforceable arrangement between a bank and a counter-party that creates a single legal

obligation covering all included individual contracts. This means that a bank’s obligation, in the event of thedefault or insolvency of one of the parties, would be the net sum of all positive and negative fair values ofcontracts included in the bilateral netting arrangement.

• Credit derivative: A contract that transfers credit risk from a protection buyer to a credit protection seller. Creditderivative products can take many forms, such as credit default swaps, credit linked notes and total return swaps.

• Derivative: A financial contract whose value is derived from the performance of assets, interest rates, currencyexchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts includingstructured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and variouscombinations thereof.

• Exchange-traded derivative contracts: Standardized derivative contracts (e.g. futures contracts and options) thatare transacted on an organized futures exchange.

• Gross negative fair value: The sum of the fair values of contracts where the bank owes money to itscounter-parties, without taking into account netting. This represents the maximum losses the bank’scounter-parties would incur if the bank defaults and there is no netting of contracts, and no bank collateral washeld by the counter-parties.

• Gross positive fair value: The sum total of the fair values of contracts where the bank is owed money by itscounter-parties, without taking into account netting. This represents the maximum losses a bank could incur if allits counter-parties default and there is no netting of contracts, and the bank holds no counter-party collateral.

• High-risk mortgage securities: Securities where the price or expected average life is highly sensitive to interestrate changes, as determined by the FFIEC policy statement on high-risk mortgage securities.

• Notional amount: The nominal or face amount that is used to calculate payments made on swaps and other riskmanagement products. This amount generally does not change hands and is thus referred to as notional.

• Over-the-counter (OTC) derivative contracts: Privately negotiated derivative contracts that are transacted offorganized futures exchanges.

• Structured notes: Non-mortgage-backed debt securities, whose cash flow characteristics depend on one or moreindices and / or have embedded forwards or options.

• Total risk-based capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common shareholdersequity, perpetual preferred shareholders equity with non-cumulative dividends, retained earnings, and minorityinterests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt,intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a bank’s allowancefor loan and lease losses.

See also• Credit risk• Dual currency deposit• FX Option• Interest rate derivative• Forward contract• Futures contract• Option (finance)

Derivative 59

References[1] McDonald, R.L. (2006) Derivatives markets. Boston: Addison-Wesley[2] Taylor, Francesca. (2007). Mastering Derivatives Markets. Prentice Hall[3] Chisolm, Derivatives Demystified (Wiley 2004)[4] Chisolm, Derivatives Demystified (Wiley 2004) Notional sum means there is no actual principal.[5] News.BBC.co.uk (http:/ / news. bbc. co. uk/ 2/ hi/ business/ 375259. stm), "How Leeson broke the bank - BBC Economy"[6] BIS survey: The Bank for International Settlements (BIS) semi-annual OTC derivatives statistics (http:/ / www. bis. org/ statistics/ derstats.

htm) report, for end of June 2008, shows $683.7 trillion total notional amounts outstanding of OTC derivatives with a gross market value of$20 trillion. See also Prior Period Regular OTC Derivatives Market Statistics (http:/ / www. bis. org/ publ/ otc_hy0805. htm).

[7] Hull, J.C. (2009). Options, futures, and other derivatives . Upper Saddle River, NJ : Pearson/Prentice Hall, c2009[8] Futures and Options Week: According to figures published in F&O Week 10 October 2005. See also FOW Website (http:/ / www. fow. com).[9] Biz.Yahoo.com (http:/ / biz. yahoo. com/ c/ e. html)[10] FOW.com (http:/ / www. fow. com/ Article/ 1385702/ Issue/ 26557/ Emissions-derivatives-1. html), Emissions derivatives, 1 December

2005[11] Bis.org (http:/ / www. bis. org/ statistics/ derstats. htm)[12] "Launch of the WIDER study on The World Distribution of Household Wealth: 5 December 2006" (http:/ / www. wider. unu. edu/ events/

past-events/ 2006-events/ en_GB/ 05-12-2006/ ). . Retrieved 9 June 2009.[13] Derivatives Counter-party Risk: Lessons from AIG and the Credit Crisis (http:/ / www. compoundinghappens. com/ opinion/

DerivativesCounterPartyRisk. htm)[14] "Buffett's Time Bomb Goes Off on Wall Street" by James B. Kelleher of Reuters (http:/ / www. reuters. com/ article/ newsOne/

idUSN1837154020080918)[15] Risk Magazine article on post-Katrina financing[16] http:/ / www. berkshirehathaway. com/ 2002ar/ 2002ar. pdf

60

Finance of states

Public financePublic finance is a field of economics concerned with paying for collective or governmental activities, and with theadministration and design of those activities. The field is often divided into questions of what the government orcollective organizations should do or are doing, and questions of how to pay for those activities. The broader term,public economics, and the narrower term, government finance, are also often used.

OverviewThe proper role of government provides a starting point for the analysis of public finance. In theory, private marketswill allocate goods and services among individuals efficiently (in the sense that no waste occurs and that individualtastes are matching with the economy's productive abilities). If private markets were able to provide efficientoutcomes and if the distribution of income were socially acceptable, then there would be little or no scope forgovernment. In many cases, however, conditions for private market efficiency are violated. For example, if manypeople can enjoy the same good at the same time (non-rival, non-excludable consumption), then private markets maysupply too little of that good. National defense is one example of non-rival consumption, or of a public good."Market failure" occurs when private markets do not allocate goods or services efficiently. The existence of marketfailure provides an efficiency-based rationale for collective or governmental provision of goods and services.Externalities, public goods, informational advantages, strong economies of scale, and network effects can causemarket failures. Public provision via a government or a voluntary association, however, is subject to otherinefficiencies, termed "government failure."Under broad assumptions, government decisions about the efficient scope and level of activities can be efficientlyseparated from decisions about the design of taxation systems (Diamond-Mirlees separation). In this view, publicsector programs should be designed to maximize social benefits minus costs (cost-benefit analysis), and thenrevenues needed to pay for those expenditures should be raised through a taxation system that creates the fewestefficiency losses caused by distortion of economic activity as possible. In practice, government budgeting or publicbudgeting is substantially more complicated and often results in inefficient practices.Government can pay for spending by borrowing (for example, with government bonds), although borrowing is amethod of distributing tax burdens through time rather than a replacement for taxes. A deficit is the differencebetween government spending and revenues. The accumulation of deficits over time is the total public debt. Deficitfinance allows governments to smooth tax burdens over time, and gives governments an important fiscal policy tool.Deficits can also narrow the options of successor governments.Public finance is closely connected to issues of income distribution and social equity. Governments can reallocateincome through transfer payments or by designing tax systems that treat high-income and low-income householdsdifferently.The "Public Choice" approach to public finance seeks to explain how self-interested voters, politicians, andbureaucrats actually operate, rather than how they should operate.

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Public Finance ManagementCollection of sufficient resources from the economy in an appropriate manner along with allocating and use of theseresources efficiently and effectively constitute good financial management. Resource generation, resource allocationand expenditure management (resource utilization) are the essential components of a public financial managementsystem.Public Finance Management (PFM) basically deals with all aspects of resource mobilization and expendituremanagement in government. Just as managing finances is a critical function of management in any organization,similarly public finance management is an essential part of the governance process. Public finance managementincludes resource mobilization, prioritization of programmes, the budgetary process, efficient management ofresources and exercising controls. Rising aspirations of people are placing more demands on financial resources. Atthe same time, the emphasis of the citizenry is on value for money, thus making public finance managementincreasingly vital.

Government expendituresEconomists classify government expenditures into three main types. Government purchases of goods and servicesfor current use are classed as government consumption. Government purchases of goods and services intended tocreate future benefits--- such as infrastructure investment or research spending--- are classed as governmentinvestment. Government expenditures that are not purchases of goods and services, and instead just representtransfers of money--- such as social security payments--- are called transfer payments.[1]

Government operationsGovernment operations are those activities involved in the running of a state or a functional equivalent of a state (forexample, tribes, secessionist movements or revolutionary movements) for the purpose of producing value for thecitizens. Government operations have the power to make, and the authority to enforce rules and laws within a civil,corporate, religious, academic, or other organization or group.[2] In its broadest sense, "to govern" means to rule overor supervise, whether over a state, a set group of people, or a collection of people.[3]

Income distribution• Income distribution - Some forms of government expenditure are specifically intended to transfer income from

some groups to others. For example, governments sometimes transfer income to people that have suffered a lossdue to natural disaster. Likewise, public pension programs transfer wealth from the young to the old. Other formsof government expenditure which represent purchases of goods and services also have the effect of changing theincome distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Publiceducation transfers wealth to families with children in these schools. Public road construction transfers wealthfrom people that do not use the roads to those people that do (and to those that build the roads).

• Income Security• Employment insurance• Health Care

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Financing of government expenditures

Budgeted revenues of governments in 2006

Government expenditures are financed in two ways:• Government revenue

• Taxes• Non-tax revenue (revenue from government-owned corporations,

sovereign wealth funds, sales of assets, or Seigniorage• Government borrowing

How a government chooses to finance its activities can have important effects on the distribution of income andwealth (income redistribution) and on the efficiency of markets (effect of taxes on market prices and efficiency). Theissue of how taxes affect income distribution is closely related to tax incidence, which examines the distribution oftax burdens after market adjustments are taken into account. Public finance research also analyzes effects of thevarious types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement.

TaxesTaxation is the central part of modern public finance. Its significance arises not only from the fact that it is by far themost important of all revenues but also because of the gravity of the problems created by the present day heavy taxburden. The main objective of taxation is raising revenue. A high level of taxation is necessary in a welfare State tofulfill its obligations. Taxation is used as an instrument of attaining certain social objectives i.e. as a means ofredistribution of wealth and thereby reducing inequalities. Taxation in a modern Government is thus needed notmerely to raise the revenue required to meet its ever-growing expenditure on administration and social services butalso to reduce the inequalities of income and wealth. Taxation is also needed to draw away money that wouldotherwise go into consumption and cause inflation to rise.[4]

A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functionalequivalent of a state (for example, tribes, secessionist movements or revolutionary movements). Taxes could also beimposed by a subnational entity. Taxes consist of direct tax or indirect tax, and may be paid in money or as corvéelabor. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government[ . . .] a payment exacted by legislative authority."[5] A tax "is not a voluntary payment or donation, but an enforcedcontribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [ . . .]whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or othername."[6]

• There are various types of taxes, broadly divided into two heads - direct (which is proportional) and indirect tax(which is differential in nature):

• Stamp duty, levied on documents• Excise tax (tax levied on production for sale, or sale, of a certain good)• Sales tax (tax on business transactions, especially the sale of goods and services)

• Value added tax (VAT) is a type of sales tax• Services taxes on specific services

• Road tax; Vehicle excise duty (UK), Registration Fee (USA), Regco (Australia), Vehicle Licensing Fee (Brazil)etc

• Gift tax• Duties (taxes on importation, levied at customs)• Corporate income tax on corporations (incorporated entities)• Wealth tax

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• Personal income tax (may be levied on individuals, families such as the Hindu joint family in India,unincorporated associations, etc.)

DebtGovernments, like any other legal entity, can take out loans, issue bonds and make financial investments.Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government;either central government, federal government, municipal government or local government. Some local governmentsissue bonds based on their taxing authority, such as tax increment bonds or revenue bonds.As the government represents the people, government debt can be seen as an indirect debt of the taxpayers.Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed toforeign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Lesscreditworthy countries sometimes borrow directly from commercial banks or international institutions such as theInternational Monetary Fund or the World Bank.Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected andoutlays are recognized when paid. Some consider all government liabilities, including future pension payments andpayments for goods and services the government has contracted for but not yet paid, as government debt. Thisapproach is called accrual accounting, meaning that obligations are recognized when they are acquired, or accrued,rather than when they are paid.public finance tends to analyse the implication of government taxation and expenditure in a given year

SeigniorageSeigniorage is the net revenue derived from the issuing of currency. It arises from the difference between the facevalue of a coin or bank note and the cost of producing, distributing and eventually retiring it from circulation.Seigniorage is an important source of revenue for some national banks, although it provides a very small proportionof revenue for advanced industrial countries.

Public Finance in Socialist EconomiesPublic finance in centrally planned economies has differed in fundamental ways from that in market economies.Some state-owned enterprises generated profits that helped finance government activities. The government entitiesthat operate for profit are usually manufacturing and financial institutions, services such as nationalized healthcaredo not operate for a profit to keep costs low for consumers. The Soviet Union relied heavily on turnover taxes onretail sales. Sales of natural resources, and especially petroleum products, were an important source of revenue forthe Soviet Union. In Venezuela, the state-run oil company PSDVA provides revenue for the government to fund itsoperations and programs that would otherwise be profit for private owners. Various market socialist systems orproposals utilize revenue generated by state-run enterprises to go fund social dividends, eliminating the need fortaxation altogether. In various mixed economies, the revenue generated by state-run or state-owned enterprises areused for various state endeavors; typically the revenue generated by state and government agencies goes into asovereign wealth fund. An example of this is the Alaska Permanent Fund and Singapore's Temasek Holdings.

Government Finance Statistics and MethodologyMacroeconomic data to support public finance economics are generally referred to as fiscal or government financestatistics (GFS). The Government Finance Statistics Manual 2001 (GFSM 2001) [7]is the internationally acceptedmethodology for compiling fiscal data. It is consistent with regionally accepted methodologies such as the EuropeanSystem of Accounts 1995 [8]and consistent with the methodology of the System of National Accounts (SNA1993) [9]

and broadly in line with its most recent update, the SNA2008 [10].

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Challenges in measuring governmentThe size of governments, their institutional composition and complexity, their ability to carry out large andsophisticated operations, and their impact on the other sectors of the economy warrant a well-articulated system tomeasure government economic operations.The GFSM 2001 addresses the institutional complexity of government by defining various levels of government. Themain focus of the GFSM 2001 is the general government sector defined as the group of entities capable ofimplementing public policy through the provision of primarily nonmarket goods and services and the redistributionof income and wealth, with both activities supported mainly by compulsory levies on other sectors. The GFSM 2001disaggregates the general government into subsectors: central government, state government, and local government(See Figure 1). The concept of general government does not include public corporations. The general governmentplus the public corporations comprise the public sector (See Figure 2).

Figure 1: General Government (IMF Government Finance Statistics Manual 2001(Washington,2001) pp.13

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Figure 2: Public Sector(IMF Government Finance Statistics Manual 2001(Washington, 2001)pp.15

The GFSM 2001 framework is similar to the financial accounting of businesses. For example, it recommends thatgovernments produce a full set of financial statements including the statement of government operations (akin to theincome statement), the balance sheet, and a cash flow statement. Two other similarities between the GFSM 2001 andbusiness financial accounting are the recommended use of accrual accounting as the basis of recording and thepresentations of stocks of assets and liabilities at market value. It is an improvement on the prior methodology -Government Finance Statistics Manual 1986 – based on cash flows and without a balance sheet statement.

Users of GFSThe GFSM 2001 recommends standard tables including standard fiscal indicators that meet a broad group of users including policy makers, researchers, and investors in sovereign debt. Government finance statistics should offer data for topics such as the fiscal architecture, the measurement of the efficiency and effectiveness of government expenditures, the economics of taxation, and the structure of public financing. The GFSM 2001 provides a blueprint for the compilation, recording, and presentation of revenues, expenditures, stocks of assets, and stocks of liabilities. The GFSM 2001 also defines some indicators of effectiveness in government’s expenditures, for example the compensation of employees as a percentage of expense. The GFSM 2001 includes a functional classification of expense as defined by the Classification of Functions of Government (COFOG) . This functional classification allows policy makers to analyze expenditures on categories such as health, education, social protection, and environmental protection. The financial statements can provide investors with the necessary information to assess the capacity of a government to service and repay its debt, a key element determining sovereign risk, and risk premia. Like the risk of default of a private corporation, sovereign risk is a function of the level of debt, its ratio to liquid assets, revenues and expenditures, the expected growth and volatility of these revenues and expenditures, and the cost of servicing the debt. The government’s financial statements contain the relevant information for this analysis. The government’s balance sheet presents the level of the debt; that is the government’s liabilities. The memorandum items of the balance sheet provide additional information on the debt including its maturity and whether it is owed to domestic or external residents. The balance sheet also presents a disaggregated classification of financial and non-financial assets. These data help estimate the resources a government can potentially access to repay its debt. The statement of operations (“income statement”) contains the revenue and expense accounts of the government. The revenue accounts are divided into subaccounts, including the different types of taxes, social contributions, dividends

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from the public sector, and royalties from natural resources. Finally, the interest expense account is one of thenecessary inputs to estimate the cost of servicing the debt.

Fiscal Data Using the GFSM 2001 MethodologyGFS can be accessible through several sources. The International Monetary Fund publishes GFS in two publications:International Financial Statistics and the Government Finance Statistics Yearbook. The World Bank gathersinformation on external debt. On a regional level, the Organization for Economic Co-operation and Development(OECD) compiles general government account data for its members, and Eurostat, following a methodologycompatible with the GFSM 2001, compiles GFS for the members of the European Union.

See also• Association of Public Treasurers of the United States and Canada• California Municipal Treasurers Association (CMTA)• California Society of Municipal Finance Officers (CSMFO)• Government Finance Officers Association (GFOA)• Government Finance Officers Association of Texas (GFOAT)• Corporate finance• Fiscal incidence• Functional finance• Government budget• Personal finance• Public economics• Public choice• Harris School of Public Policy Studies

References• Anthony B. Atkinson and Joseph E. Stiglitz (1980). Lectures in Public Economics, McGraw-Hill Economics

Handbook Series• James M. Buchanan and Richard A. Musgrave (1989). Public Finance and Public Choice: Two Contrasting

Visions of the State. MIT Press• Richard A. Musgrave (1959). The Theory of Public Finance: A Study in Political Economy.• R.A. Musgrave (1987). "public finance," The New Palgrave: A Dictionary of Economics, v. 3, pp. 1055–60.• Richard A. Musgrave and Peggy B. Musgrave (1973). Public Finance in Theory and Practice• Joseph E. Stiglitz (2000). Economics of the Public Sector, 3rd ed. Norton.• LOOZER

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External links• [11] - Taxation and Public Finance course at the Harris School of Public Policy Studies• [12] - State and Local Public Finance course at the Harris School of Public Policy Studies• IMF--Dissemination Standards Bulletin Board-- Subscribing ... [13] (see "fiscal sector")• The IMF's Public Financial Management Blog [14]

• US Debt Clock.org [15] - Real Time U.S. Debt Clock

References[1] Robert Barro and Vittorio Grilli (1994), European Macroeconomics, Ch. 15-16. Macmillan, ISBN 0333577647.[2] Columbia Encyclopedia, Government, Columbia University Press[3] See for example, The American Heritage Dictionary of the English Language, entry "Govern"[4] http:/ / budget. ap. gov. in/ es2k_pf. htm[5] Black's Law Dictionary, p. 1307 (5th ed. 1979).[6] Id.[7] http:/ / www. imf. org/ external/ pubs/ ft/ gfs/ manual/ index. htm[8] http:/ / circa. europa. eu/ irc/ dsis/ nfaccount/ info/ data/ esa95/ esa95-new. htm[9] http:/ / unstats. un. org/ unsd/ sna1993/ toctop. asp?L1=4[10] http:/ / unstats. un. org/ unsd/ nationalaccount/ sna2008. asp[11] http:/ / harrisschool. uchicago. edu/ Programs/ courses/ description. html?course=32900[12] http:/ / harrisschool. uchicago. edu/ Programs/ courses/ description. html?course=32100[13] http:/ / dsbb. imf. org/ Applications/ web/ sddsnsdppage/[14] http:/ / blog-pfm. imf. org[15] http:/ / www. usdebtclock. org/

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Financial economics

Financial economicsFinancial economics is the branch of economics concerned with "the allocation and deployment of economicresources, both spatially and across time, in an uncertain environment".[1] It is additionally characterised by its"concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of atrade".[2] The questions within financial economics are typically framed in terms of "time, uncertainty, options andinformation".[2]

• Time: money now is traded for money in the future.• Uncertainty (or risk): The amount of money to be transferred in the future is uncertain.• options: one party to the transaction can make a decision at a later time that will affect subsequent transfers of

money.• Information: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future

monetary value (FMV).The subject is usually taught at a postgraduate level; see Master of Financial Economics.

Subject matterFinancial economics is the branch of economics studying the interrelation of financial variables, such as prices,interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates oninfluences of real economic variables on financial ones, in contrast to pure finance.It studies:• Valuation - Determination of the fair value of an asset

• How risky is the asset? (identification of the asset appropriate discount rate)• What cash flows will it produce? (discounting of relevant cash flows)• How does the market price compare to similar assets? (relative valuation)• Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)

• Financial markets and instruments• Commodities - topics• Stocks - topics• Bonds - topics• Money market instruments- topics• Derivatives - topics

• Financial institutions and regulationFinancial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise therelationships.

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Models in Financial economicsFinancial economics is primarily concerned with building models to derive testable or policy implications fromacceptable assumptions. Some fundamental ideas in financial economics are portfolio theory, the Capital AssetPricing Model. Portfolio theory studies how investors should balance risk and return when investing in many assetsor securities. The Capital Asset Pricing Model describes how markets should set the prices of assets in relation tohow risky they are. The Modigliani-Miller Theorem describes conditions under which corporate financing decisionsare irrelevant for value, and acts as a benchmark for evaluating the effects of factors outside the model that do affectvalue.A common assumption is that financial decision makers act rationally (see Homo economicus; efficient markethypothesis). However, recently, researchers in experimental economics and experimental finance have challengedthis assumption empirically. They are also challenged - theoretically - by behavioral finance, a discipline primarilyconcerned with the limits to rationality of economic agents.Other common assumptions include market prices following a random walk, or asset returns being normallydistributed. Empirical evidence suggests that these assumptions may not hold, and in practice, traders and analysts,and particularly risk managers, frequently modify the "standard models".

See also• List of economics topics• List of economists• List of finance topics• List of master's degrees in financial economics

External links

Theory• Foundations of Finance [3], Theory of Finance [3], Eugene Fama, University of Chicago Graduate School of

Business• Macro-Investment Analysis [4], Professor William Sharpe, Stanford Graduate School of Business• Lecture Notes in Financial Economics [5], Antonio Mele, London School of Economics• Great Moments in Financial Economics I [6], II [7], "III" [8]. Archived from the original [9] on 2007-09-27.; IVa

[10]; "IVb" [11]. Archived from the original [12] on 2007-09-27.. Prof. Mark Rubinstein, Haas School of Business• Microfoundations of Financial Economics [13] Prof. André Farber Solvay Business School• Handbook of the Economics of Finance [14], G.M. Constantinides, M. Harris, R. M. Stulz• Financial economics [15], International Encyclopedia of the Social & Behavioral Sciences, Oxford: Elsevier,

2001.• Financial economics topics [16] with Abstracts, The New Palgrave Dictionary of Economics, 2008.• An introduction to investment theory [17], Prof. William Goetzmann, Yale School of Management• Notes on General Equilibrium Asset Pricing [18], Prof. Paulo Brito, ISEG, Technical University of Lisbon

Financial economics 70

Context and history• Finance Theory [19], The History of Economic Thought Website, The New School• The Scientific Evolution of Finance [20] Prof. Don Chance, Prof. Pamela Peterson• 50 Years of Finance [21] Prof. André Farber, Université Libre de Bruxelles• "A Short History of Investment Forecasting" [22]. Archived from the original [23] on 2007-10-12., Professor

Michael Phillips, California State University, Northridge• Pioneers of Finance [24], Prof. Larry Guin, Murray State University

Links and portals• Financial Economics Links on WebEc [25]

• JEL Classification Codes Guide [26]

• Financial Economics Links on RFE [27]

• SSRN Financial Economics Network [28]

• "Books on Financial Economics": list on economicsnetwork.ac.uk [29]

References[1] "Robert C. Merton - Nobel Lecture" (http:/ / nobelprize. org/ nobel_prizes/ economics/ laureates/ 1997/ merton-lecture. pdf) (PDF). .

Retrieved 2009-08-06.[2] "Financial Economics" (http:/ / www. stanford. edu/ ~wfsharpe/ mia/ int/ mia_int2. htm). Stanford.edu. . Retrieved 2009-08-06.[3] http:/ / faculty. chicagogsb. edu/ eugene. fama/ research/ index. htm[4] http:/ / www. stanford. edu/ ~wfsharpe/ mia/ int/ mia_int2. htm[5] http:/ / fmg. lse. ac. uk/ ~antonio/ files/ fin_eco. pdf[6] http:/ / web. archive. org/ web/ 20070927123033/ http:/ / www. in-the-money. com/ artandpap/ I+ Present+ Value. doc[7] http:/ / web. archive. org/ web/ 20070927123027/ http:/ / www. in-the-money. com/ artandpap/ II+ Modigliani-Miller+ Theorem. doc[8] http:/ / web. archive. org/ web/ 20070927123024/ http:/ / www. in-the-money. com/ artandpap/ III+ Short-Sales+ and+ Stock+ Prices. doc[9] http:/ / www. in-the-money. com/ artandpap/ III%20Short-Sales%20and%20Stock%20Prices. doc[10] http:/ / web. archive. org/ web/ 20070927123029/ http:/ / www. in-the-money. com/ artandpap/ IV+ Fundamental+ Theorem+ -+ Part+ I. doc[11] http:/ / web. archive. org/ web/ 20070927123021/ http:/ / www. in-the-money. com/ artandpap/ IV+ Fundamental+ Theorem+ -+ Part+ II.

doc[12] http:/ / www. in-the-money. com/ artandpap/ IV%20Fundamental%20Theorem%20-%20Part%20II. doc[13] http:/ / www. ulb. ac. be/ cours/ solvay/ farber/ PhD. htm[14] http:/ / ideas. repec. org/ b/ eee/ finhes/ 2. html#related[15] http:/ / www. sciencedirect. com/ science?_ob=RefWorkIndexURL& _idxType=SC& _cdi=23486& _refWorkId=21&

_explode=151000131,151000133& _alpha=& _acct=C000050221& _version=1& _userid=10&md5=f2c773b745753022e1cccc9a38d83508& refID=151000133#151000133

[16] http:/ / www. dictionaryofeconomics. com/ articles_by_topic?topicid=G[17] http:/ / viking. som. yale. edu/ will/ web_pages/ will/ finman540/ classnotes/ notes. html[18] http:/ / pascal. iseg. utl. pt/ ~pbrito/ cursos/ mestrado/ fef/ fef2009. pdf[19] http:/ / cepa. newschool. edu/ het/ schools/ finance. htm[20] http:/ / www. finance-and-physics. org/ Library/ Articles3/ scienceandfinance/ science. htm[21] http:/ / www. ulb. ac. be/ cours/ solvay/ farber/ VUB/ 01%20Inaugurale%20rede. pdf[22] http:/ / web. archive. org/ web/ 20071012112134/ http:/ / roundtable. informs. org/ public-access/ min061a. htm[23] http:/ / roundtable. informs. org/ public-access/ min061a. htm[24] http:/ / campus. murraystate. edu/ academic/ faculty/ larry. guin/ FinancialHistory. htm[25] http:/ / www. helsinki. fi/ WebEc/ webecg. html[26] http:/ / www. aeaweb. org/ jel/ guide/ jel. php?class=G[27] http:/ / rfe. org/ showCat. php?cat_id=56[28] http:/ / www. ssrn. com/ fen/ index. html[29] http:/ / www. economicsnetwork. ac. uk/ books/ FinancialEconomics. htm

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Financial mathematics

Financial mathematicsMathematical finance is applied mathematics concerned with financial markets. The subject has a close relationshipwith the discipline of financial economics, which is concerned with much of the underlying theory. Generally,mathematical finance will derive, and extend, the mathematical or numerical models suggested by financialeconomics. Thus, for example, while a financial economist might study the structural reasons why a company mayhave a certain share price, a financial mathematician may take the share price as a given, and attempt to usestochastic calculus to obtain the fair value of derivatives of the stock (see: Valuation of options).In terms of practice, mathematical finance also overlaps heavily with the field of computational finance (also knownas financial engineering). Arguably, these are largely synonymous, although the latter focuses on application, whilethe former focuses on modeling and derivation (see: Quantitative analyst). The fundamental theorem ofarbitrage-free pricing is one of the key theorems in mathematical finance. Many universities around the world nowoffer degree and research programs in mathematical finance; see Master of Quantitative Finance.

HistoryThe history of mathematical finance starts with The Theory of Speculation (published 1900) by Louis Bachelier,which discussed the use of Brownian motion to evaluate stock options. However, it hardly caught any attentionoutside academia.The first influential work of mathematical finance is the theory of portfolio optimization by Harry Markowitz onusing mean-variance estimates of portfolios to judge investment strategies, causing a shift away from the concept oftrying to identify the best individual stock for investment. Using a linear regression strategy to understand andquantify the risk (i.e. variance) and return (i.e. mean) of an entire portfolio of stocks and bonds, an optimizationstrategy was used to choose a portfolio with largest mean return subject to acceptable levels of variance in the return.Simultaneously, William Sharpe developed the mathematics of determining the correlation between each stock andthe market. For their pioneering work, Markowitz and Sharpe, along with Merton Miller, shared the 1990 NobelMemorial Prize in Economic Sciences, for the first time ever awarded for a work in finance.The portfolio-selection work of Markowitz and Sharpe introduced mathematics to the “black art” of investmentmanagement. With time, the mathematics has become more sophisticated. Thanks to Robert Merton and PaulSamuelson, one-period models were replaced by continuous time, Brownian-motion models, and the quadratic utilityfunction implicit in mean–variance optimization was replaced by more general increasing, concave utility functions[1] .The next major revolution in mathematical finance came with the work of Fischer Black and Myron Scholes alongwith fundamental contributions by Robert C. Merton, by modeling financial markets with stochastic models. For thisM. Scholes and R. Merton were awarded the 1997 Nobel Memorial Prize in Economic Sciences. Black wasineligible for the prize because of his death in 1995.More sophisticated mathematical models and derivative pricing strategies were then developed but their credibilitywas damaged by the financial crisis of 2007–2010. Bodies such as the Institute for New Economic Thinking are nowattempting to establish more effective theories and methods.[2]

Financial mathematics 72

Mathematical finance articles

Mathematical tools• Asymptotic analysis• Calculus• Copulas• Differential equations• Expected value• Ergodic theory• Feynman–Kac formula• Fourier transform• Gaussian copulas• Girsanov's theorem• Itô's lemma• Martingale representation theorem• Mathematical models• Monte Carlo method• Numerical analysis• Real analysis• Partial differential equations• Probability• Probability distributions

• Binomial distribution• Log-normal distribution

• Quantile functions• Heat equation

• Radon–Nikodym derivative• Risk-neutral measure• Stochastic calculus

• Brownian motion• Lévy process

• Stochastic differential equations• Stochastic volatility

• Numerical partial differential equations• Crank–Nicolson method• Finite difference method

• Value at risk• Volatility

• ARCH model• GARCH model

Financial mathematics 73

Derivatives pricing• The Brownian Motion Model of Financial Markets• Rational pricing assumptions

• Risk neutral valuation• Arbitrage-free pricing

• Futures contract pricing• Options

• Put–call parity (Arbitrage relationships for options)• Intrinsic value, Time value• Moneyness• Pricing models

• Black–Scholes model• Black model• Binomial options model• Monte Carlo option model• Implied volatility, Volatility smile• SABR Volatility Model• Markov Switching Multifractal• The Greeks• Finite difference methods for option pricing

• Optimal stopping (Pricing of American options)• Interest rate derivatives

• Short rate model• Hull–White model• Cox–Ingersoll–Ross model• Chen model

• LIBOR Market Model• Heath–Jarrow–Morton framework

See also• Computational finance• Quantitative Behavioral Finance• Derivative (finance), list of derivatives topics• Modeling and analysis of financial markets• International Swaps and Derivatives Association• Fundamental financial concepts - topics• Model (economics)• List of finance topics• List of economics topics, List of economists• List of accounting topics• Statistical Finance

Financial mathematics 74

References• Harold Markowitz, Portfolio Selection, Journal of Finance, 7, 1952, pp. 77–91• William Sharpe, Investments, Prentice-Hall, 1985

References[1] Karatzas, I., Methods of Mathematical Finance, Secaucus, NJ, USA: Springer-Verlag New York, Incorporated, 1998[2] Gillian Tett (April 15 2010), Mathematicians must get out of their ivory towers (http:/ / www. ft. com/ cms/ s/ 0/

cfb9c43a-48b7-11df-8af4-00144feab49a. html), Financial Times,

75

Experimental finance

Experimental financeThe goals of experimental finance are to establish different market settings and environments to observeexperimentally and analyze agents' behavior and the resulting characteristics of trading flows, information diffusionand aggregation, price setting mechanism and returns processes. This can happen for instance by conducting tradingsimulations or establishing and studying the behaviour of people in artificial competitive market-like settings.Researchers in experimental finance can study to what extent existing financial economics theory makes validpredictions and attempt to discover new principles on which theory can be extended.The methodology of experimental finance is closely related to that of Experimental economics.

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Behavioral finance

Behavioral financeBehavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factorsin understanding the economic decisions of individuals and institutions performing economic functions, includingconsumers, borrowers and investors, and their effects on market prices, returns and the resource allocation. Thefields are primarily concerned with the bounds of rationality (selfishness, self-control) of economic agents.Behavioral models typically integrate insights from psychology with neo-classical economic theory.Behavioral analysts are not only concerned with the effects of market decisions but also with public choice, whichdescribes another source of economic decisions with related biases towards promoting self-interest. Technicalanalysts consider behavioral economics' academic cousin, behavioral finance, to be a rationalization for technicalanalysis.[1]

HistoryDuring the classical period, economics was closely linked to psychology. For example, Adam Smith wrote TheTheory of Moral Sentiments, which proposed psychological explanations of individual behavior and JeremyBentham wrote extensively on the psychological underpinnings of utility. However, during the development ofneo-classical economics economists sought to reshape the discipline as a natural science, deducing economicbehavior from assumptions about the nature of economic agents. They developed the concept of homo economicuswhose psychology was fundamentally rational. This well-intentioned effort led to unintended and unforeseen errors.However, many important neo-classical economists employed psychological explanations, including FrancisEdgeworth, Vilfredo Pareto, Irving Fisher and John Maynard Keynes. Economic psychology emerged in the 20thcentury in the works of Frenchman Gabriel Tarde[2] American George Katona[3] and Hungarian Laszlo Garai[4] .Expected utility and discounted utility models began to gain acceptance, generating testable hypotheses aboutdecision making given uncertainty and intertemporal consumption, respectively. Observed and repeatable anomalieseventually challenged those hypotheses.In the 1960s cognitive psychology began to shed more light on the brain as an information processing device (incontrast to behaviorist models). Psychologists in this field, such as Ward Edwards,[5] Amos Tversky and DanielKahneman began to compare their cognitive models of decision-making under risk and uncertainty to economicmodels of rational behavior. In mathematical psychology, there is a longstanding interest in the transitivity ofpreference and what kind of measurement scale utility constitutes (Luce, 2000).[6]

Prospect theoryIn 1979 Kahneman and Tversky wrote Prospect theory: An Analysis of Decision Under Risk, an important paper thatused cognitive psychology to explain various divergences of economic decision making from neo-classical theory.[7]

Prospect theory is an example of generalized expected utility theory. Although not a conventional part of behavioraleconomics, generalized expected utility theory is similarly motivated by concerns about the descriptive inaccuracy ofexpected utility theory.In 1967 Nobel Laureate Gary Becker wrote Theory of Crime, a seminal work that factored psychological elements into economic decision making. Becker maintained strict consistency of preferences. Nobelist Herbert Simon developed the theory of Bounded Rationality to explain how people irrationally seek satisfaction, instead of

Behavioral finance 77

maximizing utility, as conventional economics presumed. Maurice Allais produced "Allais Paradox", a crucialchallenge to expected utility.Psychological traits such as overconfidence, projection bias, and the effects of limited attention are now part of thetheory. Other developments include a conference at the University of Chicago,[8] a special behavioral economicsedition of the Quarterly Journal of Economics ('In Memory of Amos Tversky') and Kahneman's 2002 Nobel forhaving "integrated insights from psychological research into economic science, especially concerning humanjudgment and decision-making under uncertainty".[9]

Intertemporal choiceBehavioral economics has also been applied to problems surrounding intertemporal choice. George Ainslie'shyperbolic discounting (1975) is the most prominent idea, further developed by David Laibson, Ted O'Donoghue,and Matthew Rabin, in which a high rate is used to discount the near future, and a lower rate for the far future. Thispattern of discounting is dynamically inconsistent (or time-inconsistent), and therefore inconsistent with basicmodels of rational choice, since the rate of discount between time t and t+1 will be low at time t-1, when t is the nearfuture, but high at time t when t is the present and time t+1 the near future. Richard Herrnstein's animal and humanwork on Melioration theory and Matching Law suggests that behavior follows previous reinforcement experience,verbal framing, direct-acting and verbally-governed contingencies rather than expected utility. Financial andutilitarian decision-making thus becomes a deterministic process amendable to empirical research.Other branches of behavioral economics enrich the model of the utility function without implying inconsistency inpreferences. Ernst Fehr, Armin Falk, and Matthew Rabin studied "fairness" and "reciprocal altruism", weakening theneoclassical assumption of "perfect selfishness." This work is particularly applicable to wage setting. Work on"intrinsic motivation" by Gneezy and Rustichini and on "identity" by Akerlof and Kranton assumes agents deriveutility from adopting personal and social norms in addition to consumption.Behavioral economics caught on among the general public, with the success of books like Dan Ariely's PredictablyIrrational and the appointment of well-known behavioral economists such as Larry Summers to high governmentoffices.

MethodologyBehavioral economics and finance theories developed almost exclusively from experimental observations and surveyresponses, although in more recent times real world data have taken a more prominent position. Functional magneticresonance imaging (fMRI) allows determination of which brain areas are active during economic decision making.Experiments simulating markets such as stock trading and auctions can isolate the effect of a particular bias uponbehavior. Such experiments can help narrow the range of plausible explanations. Good experiments areincentive-compatible, normally involving binding transactions and real money.

Vs experimental economicsNote that behavioral economics is distinct from experimental economics, which uses experimental methods to studyeconomic questions. Not all economics experiments are psychological. While many experimental economics studies(such as game theory) probe psychological aspects of decision making, other experiments explore institutionalfeatures or serve as "beta testing" for new market mechanisms. And not all behavioral economics uses experiments;behavioral economists rely heavily on theory and on observational studies "in the field."

Behavioral finance 78

Key observationsThree themes predominate in behavioral finance and economics:[10]

• Heuristics: People often make decisions based on approximate rules of thumb, not strict logic. See also cognitivebiases and bounded rationality.

• Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals relyon to understand and respond to events.

• Market inefficiencies: These include mis-pricings, non-rational decision making, and return anomalies. RichardThaler, in particular, has described specific market anomalies from a behavioral perspective.

Barberis, Shleifer, and Vishny [11] and Daniel, Hirshleifer, and Subrahmanyam (1998)[12] built models based onextrapolation (seeing patterns in random sequences) and overconfidence to explain security market under- andoverreactions, though their source continues to be debated. These models assume that errors or biases are positivelycorrelated across agents so that they do not cancel out in aggregate. This would be the case if a large fraction ofagents look at the same signal (such as the advice of an analyst) or have a common bias.More generally, cognitive biases may also have strong anomalous effects in the aggregate if there is social contagionof ideas and emotions (causing collective euphoria or fear) leading to phenomena such as herding and groupthink.Behavioral finance and economics rests as much on social psychology within large groups as on individualpsychology. In some behavioral models, a small deviant group can have substantial market-wide effects (e.g. Fehrand Schmidt, 1999).

TopicsModels in behavioral economics typically address a particular market anomaly and modify standard neo-classicalmodels by describing decision makers as using heuristics and subject to framing effects. In general, economicscontinues to sit within the neoclassical framework, though the standard assumption of rational behavior is oftenchallenged.

Heuristics• Prospect theory• Loss aversion• Status quo bias• Gambler's fallacy• Self-serving bias• Money illusion

Framing• Cognitive framing• Mental accounting• Anchoring

Anomalies (economic behavior)• Disposition effect• Endowment effect• Inequity aversion• Reciprocity• Intertemporal consumption• Present-biased preferences

Behavioral finance 79

• Momentum investing• Greed and fear• Herd behavior• Sunk-cost fallacy

Anomalies (market prices and returns)• Equity premium puzzle• Efficiency wage hypothesis• Price stickiness• Limits to arbitrage• Dividend puzzle• Fat tails• Calendar effect[12]

Criticisms and supportCritics of behavioral economics typically stress the rationality of economic agents.[13] They contend thatexperimentally observed behavior has limited application to market situations, as learning opportunities andcompetition ensure at least a close approximation of rational behavior.Others note that cognitive theories, such as prospect theory, are models of decision making, not generalizedeconomic behavior, and are only applicable to the sort of once-off decision problems presented to experimentparticipants or survey respondents.Traditional economists are also skeptical of the experimental and survey-based techniques which behavioraleconomics uses extensively. Economists typically stress revealed preferences over stated preferences (from surveys)in the determination of economic value. Experiments and surveys are at risk of systemic biases, strategic behaviorand lack of incentive compatibility.Rabin (1998)[14] dismisses these criticisms, claiming that consistent results are typically obtained in multiplesituations and geographies and can produce good theoretical insight. Behavioral economists have also respondedthese criticisms by focusing on field studies rather than lab experiments. Some economists see a fundamental schismbetween experimental economics and behavioral economics, but prominent behavioral and experimental economiststend to share techniques and approaches in answering common questions. For example, behavioral economists areactively investigating neuroeconomics, which is entirely experimental and cannot be verified in the field.Other proponents of behavioral economics note that neoclassical models often fail to predict outcomes in real worldcontexts. Behavioral insights can influence neoclassical models. Behavioral economists note that these revisedmodels not only reach the same correct predictions as the traditional models, but also correctly predict someoutcomes where the traditional models failed.

Behavioral finance 80

Behavioral finance

TopicsThe central issue in behavioral finance is explaining why market participants make systematic errors. Such errorsaffect prices and returns, creating market inefficiencies. It also investigates how other participants arbitrage suchmarket inefficiencies.Behavioral finance highlights inefficiencies such as under- or overreactions to information as causes of market trendsand in extreme cases of bubbles and crashes). Such reactions have been attributed to limited investor attention,overconfidence, overoptimism, mimicry (herding instinct) and noise trading.Other key observations include the asymmetry between decisions to acquire or keep resources, known as the "bird inthe bush" paradox, and loss aversion, the unwillingness to let go of a valued possession. Loss aversion appears tomanifest itself in investor behavior as a reluctance to sell shares or other equity, if doing so would result in a nominalloss.[15] It may also help explain why housing prices rarely/slowly decline to market clearing levels during periods oflow demand.Benartzi and Thaler (1995), applying a version of prospect theory, claim to have solved the equity premium puzzle,something conventional finance models have been unable to do so far.[16] Experimental finance applies theexperimental method, e.g. creating an artificial market by some kind of simulation software to study people'sdecision-making process and behavior in financial markets.

ModelsSome financial models used in money management and asset valuation incorporate behavioral finance parameters,for example:• Thaler's model of price reactions to information, with two phases, underreaction-adjustment-overreaction,

creating a price trendOne characteristic of overreaction is that average returns following announcements of good news is lower thanfollowing bad news. In other words, overreaction occurs if the market reacts too strongly or for too long tonews, thus requiring adjustment in the opposite direction. As a result, outperforming assets in one period arelikely to underperform in the following period.

• The stock image coefficient

CriticismsCritics such as Eugene Fama typically support the efficient-market hypothesis. They contend that behavioral financeis more a collection of anomalies than a true branch of finance and that these anomalies are either quickly priced outof the market or explained by appealing to market microstructure arguments. However, individual cognitive biasesare distinct from social biases; the former can be averaged out by the market, while the other can create positivefeedback loops that drive the market further and further from a "fair price" equilibrium. Similarly, for an anomaly toviolate market efficiency, an investor must be able to trade against it and earn abnormal profits; this is not the casefor many anomalies.[17]

A specific example of this criticism appears in some explanations of the equity premium puzzle. It is argued that thecause is entry barriers (both practical and psychological) and that returns between stocks and bonds should equalizeas electronic resources open up the stock market to more traders.[18] In reply, others contend that most personalinvestment funds are managed through superannuation funds, minimizing the effect of these putative entry barriers.In addition, professional investors and fund managers seem to hold more bonds than one would expect given returndifferentials.

Behavioral finance 81

QuantitativeQuantitative behavioral finance uses mathematical and statistical methodology to understand behavioral biases.Leading contributors include Gunduz Caginalp (Editor of the Journal of Behavioral Finance from 2001–2004) andcollaborators including 2002 Nobelist Vernon Smith, David Porter, Don Balenovich,[19] Vladimira Ilieva and AhmetDuran[20] and Ray Sturm.[21]

The research can be grouped into the following areas:1. Empirical studies that demonstrate significant deviations from classical theories2. Modeling using the concepts of behavioral effects together with the non-classical assumption of the finiteness of

assets3. Forecasting based on these methods4. Testing models against experimental asset markets

Key figures

Economics• Dan Ariely[22]

• Colin Camerer• Ernst Fehr• Daniel Kahneman• David Laibson• George Loewenstein• Sendhil Mullainathan[23]

• Drazen Prelec• Matthew Rabin• Herbert Simon• Paul Slovic• Vernon L. Smith• Larry Summers[24]

• Richard Thaler• Amos Tversky

Finance• Malcolm Baker• Nicholas Barberis• Gunduz Caginalp• Werner DeBondt• David Hirshleifer• Andrew Lo• Terrance Odean• Charles Plott• Hersh Shefrin• Robert Shiller• Andrei Shleifer• Richard Thaler

Behavioral finance 82

See also• Adaptive market hypothesis• Behavioral Operations Research• Cognitive bias• Cognitive psychology• Confirmation bias• Cultural economics• Culture change• Culture speculation• Economic sociology• Emotional bias• Experimental economics• Experimental finance• Habit (psychology)• Hindsight bias• Important publications in behavioral finance(economics)• Important publications in behavioral finance(sociology)• Journal of Behavioral Finance• List of cognitive biases• Neuroeconomics• Repugnancy costs• Socioeconomics• Socionomics

References• Ainslie, G. (1975). "Specious Reward: A Behavioral /Theory of Impulsiveness and Impulse Control".

Psychological Bulletin 82 (4): 463–496. PMID 1099599.• Barberis, N.; Shleifer, A.;; Vishny, R. (1998). "A Model of Investor Sentiment" [25]. Journal of Financial

Economics 49 (3): 307–343. doi:10.1016/S0304-405X(98)00027-0. Retrieved 2008-04-25.• Benartzi, Shlomo; Thaler, Richard H. (1995). "Myopic Loss Aversion and the Equity Premium Puzzle" [26]. The

Quarterly Journal of Economics (The MIT Press) 110 (1): 73–92. doi:10.2307/2118511.• Camerer, Colin, George Loewenstein, and Matthew Rabin (2003). Advances in Behavioral Economics.

Description [27] and scroll to chapter-preview links. [28]

• Cunningham, Lawrence A. (2002). "Behavioral Finance and Investor Governance". Washington & Lee LawReview 59: 767. doi:10.2139/ssrn.255778. ISSN 19426658.

• Diamond, Peter A. and Hannu Vartiainen, ed. (2007). Behavioral Economics and its Applications. Description [29]

and scroll to chapter -preview links. [30]

• Daniel, K.; Hirshleifer, D.; Subrahmanyam, A. (1998). "Investor Psychology and Security Market Under- andOverreactions". Journal of Finance 53 (6): 1839–1885. doi:10.1111/0022-1082.00077.

• Garai Laszlo (1990-2006). Identity Economics - An Alternative Economic Psychology.• Hens, Thorsten; Bachmann, Kremena (2008). Behavioural Finance for Private Banking [31]. Wiley Finance

Series. ISBN 0-470-77999-3.• Hogarth, R. M.; Reder, M. W. (1987). Rational Choice: The Contrast between Economics and Psychology.

Chicago: University of Chicago Press. ISBN 0226348571.• Kahneman, Daniel; Tversky, Amos (1979). "Prospect Theory: An Analysis of Decision under Risk" [32].

Econometrica (The Econometric Society) 47 (2): 263–291. doi:10.2307/1914185.

Behavioral finance 83

• Kahneman, Daniel; Ed Diener (2003). Well-being: the foundations of hedonic psychology. Russell SageFoundation.

• Kirkpatrick, Charles D.; Dahlquist, Julie R. (2007). Technical Analysis: The Complete Resource for FinancialMarket Technicians. Upper Saddle River, NJ: Financial Times Press. ISBN 0131531131.

• Kuran, Timur (1995). Private Truths, Public Lies: The Social Consequences of Preference Falsification, HarvardUniversity Press. Description [33] and scroll to chapter-preview links. [34]

• Luce, R Duncan (2000). Utility of Gains and Losses: Measurement-theoretical and Experimental Approaches.Mahwah, New Jersey: Lawrence Erlbaum Publishers.

• Mullainathan, S.; Thaler, R. H. (2001). "Behavioral Economics". International Encyclopedia of the Social &Behavioral Sciences. pp. 1094–1100.. Abstract. [35]

• Rabin, Matthew (1998). "Psychology and Economics". Journal of Economic Literature 36 (1): 11–46 [36]. Press+.

• Shefrin, Hersh (2002). Beyond Greed and Fear: Understanding behavioral finance and the psychology ofinvesting. New York: Oxford University Press. ISBN 0195161211.

• Shleifer, Andrei (1999). Inefficient Markets: An Introduction to Behavioral Finance. New York: OxfordUniversity Press. ISBN 0198292287.

• Simon, Herbert (1987). "Behavioral Economics". The New Palgrave: A Dictionary of Economics,. 1. pp. 221–24.• Abstracts from The New Palgrave Dictionary of Economics (2008), 2nd Edition:

Augier, Mie. "Simon, Herbert A. (1916–2001)." [37]

Bernheim, B. Douglas; Rangel, Antonio. "Behavioral public economics." [38]

Bloomfield, Robert. "Behavioral finance." [39]

Camerer, Colin F.. "Behavioral game theory." [40]

Gul, Faruk. "Behavioural economics and game theory." [41]

Simon, Herbert. "Rationality, bounded.' [42]

External links• Behavioral Finance Initiative [43] of the International Center for Finance at the Yale School of Management• Overview of Behavioral Finance [44]

• Behavioral finance extensive glossary [45]

• Geary Behavioural Economics Blog [46], of the Geary Institute at University College Dublin

References[1] Kirkpatrick 2007, p. 49[2] Tarde, G. Psychologie économique (http:/ / classiques. uqac. ca/ classiques/ tarde_gabriel/ psycho_economique_t1/ psycho_eco_t1. html)

(1902),[3] The Powerful Consumer: Psychological Studies of the American Economy. 1960.[4] Garai,L. Identity Economics - An Alternative Economic Psychology. (http:/ / www. staff. u-szeged. hu/ ~garai/ Identity_Economics. htm)

1990-2006.[5] "Ward Edward Papers" (http:/ / www. usc. edu/ libraries/ archives/ arc/ libraries/ collections/ records/ 427home. html). Archival Collections. .

Retrieved 2008-04-25.[6] Luce 2000[7] Kahneman 2003[8] Hogarth 1987[9] "Nobel Laureates 2002" (http:/ / nobelprize. org/ nobel_prizes/ lists/ 2002. html). Nobelprize.org. . Retrieved 2008-04-25.[10] Shefrin 2002[11] Barberis, Shleifer & Vishny 1998[12] Daniel, Hirshleifer & Subrahmanyam 1998[13] see Myagkov and Plott (1997) amongst others

Behavioral finance 84

[14] Rabin & 1998 11-46[15] Genesove & Mayer, 2001[16] Benartzi 1995[17] http:/ / www. dimensional. com/ famafrench/ 2009/ 08/ fama-on-market-efficiency-in-a-volatile-market. html Fama on Market Efficiency in

a Volatile Market[18] See Freeman, 2004 for a review[19] "Dr. Donald A. Balenovich" (http:/ / www. ma. iup. edu/ people/ dabalen. html). Indiana University of Pennsylvania, Mathematics

Department. .[20] "Ahmet Duran" (http:/ / www. umich. edu/ ~durana). Department of Mathematics, University of Michigan-Ann Arbor. .[21] "Dr Ray R. Sturm, CPA" (http:/ / www. bus. ucf. edu/ rsturm). College of Business Administration. .[22] "Predictably Irrational" (http:/ / www. predictablyirrational. com/ ?page_id=5). Dan Ariely. . Retrieved 2008-04-25.[23] Sendhil Mullainathan: Solving social problems with a nudge (http:/ / www. ted. com/ talks/ sendhil_mullainathan. html)[24] How Obama Is Using the Science of Change (http:/ / www. time. com/ time/ magazine/ article/ 0,9171,1889153,00. html). Michael

Grunwald, TIME, April 2, 2009.[25] http:/ / jfe. rochester. edu/[26] http:/ / jstor. org/ stable/ 2118511[27] http:/ / books. google. com/ books?id=sA4jJOjwCW4C& dq=[28] http:/ / books. google. com/ books?id=sA4jJOjwCW4C& printsec=frontcover& source=gbs_v2_summary_r& cad=0#v=onepage& q&

f=false[29] http:/ / books. google. com/ books?id=1-SVhlC9mVoC& dq=& source=gbs_navlinks_s[30] http:/ / books. google. com/ books?id=1-SVhlC9mVoC& printsec=frontcover& source=gbs_v2_summary_r& cad=0#v=onepage& q&

f=false[31] http:/ / www. bfpb. ch[32] http:/ / jstor. org/ stable/ 1914185[33] http:/ / www. hup. harvard. edu/ catalog. php?isbn=9780674707580[34] http:/ / books. google. com/ books?id=HlKBaiCpSxYC& printsec=frontcover& dq=private+ truths+ public+ lies& source=bl&

ots=zbKWjEqViP& sig=PwbkqOp05ErR3QeJ5p93B-u66yE& hl=en& ei=GmMJTPafC4GBlAemw7mdDg& sa=X& oi=book_result&ct=result& resnum=4& ved=0CCYQ6AEwAw#v=onepage& q& f=false

[35] http:/ / www. sciencedirect. com/ science?_ob=ArticleURL& _udi=B7MRM-4MT09VJ-41P& _rdoc=2& _hierId=151000134&_refWorkId=21& _explode=151000131,151000134& _fmt=high& _orig=na& _docanchor=& _idxType=SC& view=c& _ct=28&_acct=C000050221& _version=1& _urlVersion=0& _userid=10& md5=691f9ca74480a55183807ed9dcf1933e

[36] http:/ / pages. towson. edu/ jpomy/ behavioralecon/ PsychologyandEconomicsRabin98JEL. pdf[37] http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_S000455& q=behavioural& topicid=& result_number=8[38] http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_B000331& q=public%20& topicid=& result_number=3[39] http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_B000339& q=Behavioral%20economics%20& topicid=& result_number=5[40] http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_B000302& q=Behavioral%20economics%20& topicid=&

result_number=13[41] http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_G000210& q=Behavioral%20economics%20& topicid=& result_number=2[42] http:/ / www. dictionaryofeconomics. com/ article?id=pde2008_B000176& q=behavioural%20economics& topicid=& result_number=4[43] http:/ / icf. som. yale. edu/ research/ behav_finance. shtml[44] http:/ / papers. ssrn. com/ sol3/ papers. cfm?abstract_id=1488110[45] http:/ / pagesperso-orange. fr/ pgreenfinch/ bfglo/ bfglo. a. htm[46] http:/ / gearybehaviourcenter. blogspot. com/

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Intangible asset finance

Intangible asset financeIntangible Asset Finance is the branch of finance that deals with intangible assets such as patents (legal intangible)and reputation (competitive intangible). Like other areas of finance, intangible asset finance is concerned with theinterdependence of value, risk, and time.

Basic principlesIn 2003, one estimate put the economic equilibrium of intangible assets in the U.S. economy at $5 trillion, whichrepresented over one-third or more of the value of U.S. domestic corporations in the first quarter of 2001.[1]

One of the goals of people working in this field is to unlock the "hidden value" found in intangible assets through thetechniques of finance. Another goal is to measure how firm performance correlates with intangible assetmanagement.Intangible assets include business processes, Intellectual Property (IP) such as patents, trademarks, reputations forethics and integrity, quality, safety, sustainability, security, and resilience. Today, these intangibles drive cash flowand are the primary sources of risk. Intangible asset information, management, risk forecasting and risk transfer aregrowing services as the economic base divests itself of physical assets.

Business modelsA number of intangible asset business models have evolved over the years.• Patent Licensing & Enforcement Companies ("P-LECs"): These are firms that acquire patents for the sole

purpose of securing licenses and/or damages awards from infringing parties. Perhaps the most famous P-LEC isNTP, Inc., which has successfully asserted patents related to email push technology. Another name for a P-LEC is"patent troll," although this is viewed as a pejorative reference. Recently, hedge funds have raised capital for thespecific purpose of investing in patent litigation. One such hedge fund is Altitude Capital Partners, which is basedin New York.

• Royalty stream securitizers: These are firms that are engaged in the buying and selling of what are essentiallyspecialized asset-backed securities. The assets that are securitized are typically intellectual properties, such aspatents, that have been bearing royalties for a period of time. Royalty Pharma is a well known firm that uses thisbusiness model, and which has done by far the largest and most high-profile deals in this space.[2] RoyaltyPharma handled what many consider to be the first pharmaceutical patent-backed securitization to be rated byStandard and Poors, which involved a patent on the HIV drug Zerit.[3] The other parties involved in the Zerittransaction were Yale (the owner of the patent) and Bristol Myers Squibb.

• Reinsurers: These are firms that use the techniques of reinsurance to mitigate intangible asset risks. In the sameway that some firms issue Cat bonds to mitigate the risks associated with extreme weather, earthquakes, or othernatural disasters, firms exposed to substantial intangible risk can issue "intangible asset risk-linked securities" thattransfer intangible risk to hedge funds and other players in the capital markets with a sufficient appetite for risk.Steel City Re, which is based in Pittsburgh, is a thought leader regarding the use of risk transfer techniques toprotect and recover intangible asset value.[4]

• Market makers: Firms that are working to provide more liquidity to the market for intellectual property. Early market makers offered on-line intellectual property exchanges where buyers and sellers could exchange rights in

Intangible asset finance 86

licensed intellectual property, usually patents. In 2008, Ocean Tomo launched,[5] which it styled as "the onlypublic marketplace that allows buyers and sellers to place and receive offers for their intellectual property in acompletely transparent fashion." Patent Bid Ask now complements Ocean Tomo's experience in providingmulti-lot, live auctions for intellectual property. The next Ocean Tomo auction is scheduled to take place on June25–26, 2008 in Amsterdam. On April 22, 2008, Ocean Tomo reported[6] that it had transacted approximately $70million in its IP auctions across Europe and the United States. In 2009, The Intellectual Property ExchangeInternational (IPXI), headquartered in Chicago, will begin operations as the world’s first stock exchange with anintellectual property focus.

• Investment Research Firms: Companies that provide specific advice to investors on intellectual property issues.Recently, hedge fund managers have been hiring patent attorneys to follow and handicap outcomes in high stakespatent cases. IPD Analytics, which is based in Miami, is known for is research reports on patent litigation pendingin the United States district court as well at the United States Court of Appeals for the Federal Circuit.

Significant transactions• 1997: David Bowie securitizes the future royalty revenues earned from his pre-1990 music catalogue by issuing

Bowie Bonds.• 2000: BioPharma Royalty Trust completes the $115 million securitization of a single Yale patent with claims

covering Stavudine, which is a reverse transcriptase inhibitor and the active ingredient in the drug Zerit. This wasthe first publicly rated patent securitization in the U.S. At the time of the deal, Bristol Myers Squibb had theexclusive rights to distribute Zerit in the U.S. Not long after closing slow sales of Zerit along with an accountingscandal at Bristol Myers Squibb triggered the accelerated and premature amortization of the transaction. Manyobservers believe that this deal was ultimately unsuccessful because of a lack of diversification as it involved asingle patent and a single licensee.

• 2005: UCC Capital Corporation securitization of BCBG Max Azria's royalty receivables generated fromworldwide intellectual property rights worth $53 million. This transaction is recognized as the first "wholecompany securitization" involving primarily intangible assets. UCC Capital Corporation has since been acquiredby NexCen Brands, Inc., which is currently helmed by Robert W. D'Loren. NexCen is a vertically integratedglobal brand management company focused on assembling a diversified portfolio of intellectual property-centriccompanies operating in the consumer branded products and franchise industries. On May 19, 2008, NexCenissued a press release in which it stated that there was substantial doubt about its ability to continue as a goingconcern.[7]

• 2005: Ocean Tomo holds its first live IP auction. Although proceeds from the first auction were unremarkable, therelative success of the Ocean Tomo auctions that followed showed that the live auction is a reasonably viablebusiness model for monetizing intellectual property.

• 2006: Marvel Entertainment's film rights securitization in conjunction with Ambac Financial Group to provide atriple-A financial guarantee on a credit facility for Marvel backed by a slate of 10 films to be produced by MarvelStudios and intellectual property related to some of Marvel’s most popular comic book characters.[8]

Intangible asset finance 87

Government, societies, think tanks, and other non-profitsOn June 23, 2008, the United States National Academies hosted a one-day conference in Washington, D.C. entitled"Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth."The Intangible Asset Finance Society provides a forum for finance, innovation, legal and management professionalsto discover better ways to create, capture and preserve the value of intangible assets.The Athena Alliance is a non-profit organization dedicated to public education and research on the emerging globalinformation economy. On April 16, 2008 it published[9] a widely-circulated working paper on the topic of intangibleasset finance.

Further reading• Rembrandts In the Attic: Unlocking the Hidden Value of Patents [10]

• "When Balance Sheets Collide With the New Economy," New York Times, September 9, 2007 [11]

• "IP-Focused Hedge Funds Launch Amid Market Volatility", Dow Jones, April 29, 2008 [12]

• "Hedge Fund Spies in the Courtroom, IP Law & Business, May 10, 2007 [13]

• Intellectual Asset Management Magazine Blog [14]

External links• Intangible Asset Finance Society [15]

References[1] "A Trillion Dollars A Year In Intangible Investment," Leonard Nakamura in Intangible Assets: Values, Measures and Risks at 28, Hand &

Lev, Oxford University Press (2003). (http:/ / books. google. com/ books?id=RmFLUk7NydQC& printsec=frontcover& dq=Intangible+Assets:+ Values,+ Measures+ and+ Risks,& sig=W2d87NPMzvfWlTDrmUNijOziu-8#PPA28,M1)

[2] "A seller's market," The Deal, September 5, 2008 (http:/ / www. thedeal. com/ newsweekly/ features/ a-seller's-market. php#bottom)[3] "Avoiding Transaction Peril," Heller et al., in From Ideas to Assets: Investing Wisely in Intellectual Property at 487, Bruce Berman, John

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[4] Steel City Re (http:/ / www. steelcityre. com/ accelerating_innovation. shtml)[5] Patent Bid Ask (http:/ / www. patentbidask. com/ )[6] Ocean Tomo Press Release April 22, 2008 (http:/ / www. oceantomo. com/ press/ Europe_Auction_Catalogue_Release_4. 22. 08. pdf)[7] NexCen Press Release, May 19, 2008 (http:/ / www. nexcenbrands. com/ press_release93. html)[8] Ambac's press release, 2006 (http:/ / www. ambac. com/ pdfs\Deals\marvel. pdf)[9] "Intangible Asset Monetization: The Promise and the Reality" (http:/ / www. athenaalliance. org/ pdf/ IntangibleAssetMonetization. pdf)[10] http:/ / books. google. com/ books?id=jCLqq80CpwwC& dq=rembrandts+ in+ the+ attic& pg=PP1& ots=XpvuUlYAtv&

sig=UkrpK3Dt_bFbI8Hcix46iZIQGhU& hl=en& prev=http:/ / www. google. com/search%3Fhl%3Den%26q%3Drembrandts%2Bin%2Bthe%2Battic%26btnG%3DSearch& sa=X& oi=print& ct=title&cad=one-book-with-thumbnail#PPR7,M1

[11] http:/ / www. nytimes. com/ 2007/ 09/ 09/ business/ 09frame. html?ei=5124& en=f04ad9659c3221fa& ex=1346990400& adxnnl=1&partner=permalink& exprod=permalink

[12] http:/ / news. morningstar. com/ newsnet/ ViewNews. aspx?article=/ DJ/ 200804291343DOWJONESDJONLINE000826_univ. xml[13] http:/ / www. law. com/ jsp/ article. jsp?id=1178701483131[14] http:/ / www. iam-magazine. com/ blog/ default. aspx[15] http:/ / www. iafinance. org/

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Article Sources and ContributorsIntroduction  Source: http://en.wikipedia.org/w/index.php?oldid=365603795  Contributors: RichardF, X!

Finance  Source: http://en.wikipedia.org/w/index.php?oldid=369163297  Contributors: .derf, 11B, 16@r, A. B., A3RO, ABF, APH, Aaronchall, Abdullais4u, Afb525, Agemoi, Ahd2007,Alansohn, Albertod4, Alphachimp, Altenmann, Amorymeltzer, Andman8, AndreaFox2, Andres, AndrewHowse, Andy Marchbanks, Andycjp, Andyjsmith, Apb123, Apparition11, ArglebargleIV,Argon233, Ariaconditzione, Artman772000, Ayonbd2000, Balochdude, Barek, BarrelRollZRTwice, Bart133, Bcostel7, Beagel, Bearian, Beetstra, Berek, Betacommand, Bhallukchana, BiT,Blanchardb, Blathnaid, Bluerasberry, Bobo192, Bongwarrior, Brahui, Brandon, Brillig20, Bryan Derksen, Burntsauce, C.Fred, COMPFUNK2, CaMpixx, Cabe6403, Calcuscribe, Caltas,CambridgeBayWeather, Can't sleep, clown will eat me, Canterbury Tail, Capricorn42, CarlAndersOlsson, Carnildo, Catgut, Cflm001, Chasingsol, Chennaiseo, Chicago god, Chocolateboy,Cholmes75, ChrisCork, Chriscm, Chrislk02, Chuck Marean, Ckatz, Claritas, CliffC, Cmcgurran84, Codetiger, Cometstyles, Conversion script, Cookie90, Courcelles, Cretog8, Crobb305,Crzycheetah, Czalex, D6, DMCer, Da monster under your bed, Danielag2009, Danyng, Darth Panda, DavidLevinson, DeadEyeArrow, Deli, Denisutku, Deor, Derigable, Diovi, Discospinster,DisillusionedBitterAndKnackered, Doc Tropics, DocWatson42, DocendoDiscimus, DominicConnor, Donald Duck, Dr.McLeons, Dudikoff1303, EdBever, Edgar181, Edward321, Eglim, Ej463,El C, ElTyrant, Elemesh, Epbr123, Eric-Wester, Everyking, Excirial, FactsAndFigures, Falcon8765, Fawcett5, Feco, FelixKaiser, Fieldday-sunday, Financeman11, Finbar Canavan, Fintor,Flowanda, Fluent aphasia, Fplay, Freddy S., Funandtrvl, GB fan, Galoubet, Garyjeppesen, Gatesbuffett, Gazimoff, Giftlite, Gilliam, Girolamo Savonarola, Glossary, Goodwin.loves.sex,Goraikkonen, GraemeL, Green Giant, Gregalton, Guillaume Mallen, Gurch, Gwernol, Haakon, Hadal, Haffen, HamburgerRadio, Headbomb, Hebrides, Hede2000, Helixweb, HenryLi, Heron,Hi2539, Hiiindwus, Hmu111, Hvghvghvghvg, Hydrogen Iodide, IA Finance Type, IceKarma, Ilyaskvk, ImperfectlyInformed, Iridescent, Irishguy, J heisenberg, J.delanoy, JForget, JYolkowski,JaGa, Jackey0105, Jackzavaleta, Jahredtobin, Javierito92, Jeepday, Jeffrey Mall, Jem147, Jesse627, Jmnbatista, Joecool94, John254, Johnchiu, Johnmc, Jojhutton, Joseph Solis in Australia,Jovianeye, Just James, Justin73, KABADDITENNIS, Kandyman1200, Kanpai, Kashi0341, Kbh3rd, Kevinsleem, Khmarks, Killerfyang, Killiondude, King brosby, Kingpin13, Kinyupoo,Kortaggio, Kozuch, Kumar1211, Kungfukev, Kuru, Lamro, LedgendGamer, LeoNomis, Lindasepa, Lotje, Luna Santin, MER-C, MLBOSU, MSDROULIS, Madhero88, Malhonen, MamatRohimat, Mana Excalibur, Mandarax, Maple626, Marcika, Marianocecowski, Masterpiece2000, Materialscientist, Meighan, Memo12021969, Mentifisto, Mgrollman, Mic, Michael Hardy,Mikigreen, Minesweeper, Mingzhi 86, Ministry of random walks, MitchMUCH, Mitsuhirato, Modulatum, Mohankichluwiki, Monkeyman, Mordea, Mr Stephen, MrOllie, Mrg3105, Msh210,Msrasnw, Mtlhedd, Muchness, Mydogategodshat, Mygerardromance, N5iln, NJGW, Nakos2208, NeilN, Netalarm, NickMartin, Nihilozero, Ninja247, No1lakersfan, Noctibus, NoisyJinx,Notgoogle, Notinasnaid, Nuclear-Age, Nunh-huh, Nurg, Nycole365, OAG, Odie5533, Ohnoitsjamie, Oleg Alexandrov, OllieFury, Opop5757, OverSS, PGPirate, PPerviz, PaePae, Para,Paramountpublishing, Pedro, Peter Tribe, Pgreenfinch, Piano non troppo, Pigman, Pion, Plinkit, Poor Yorick, Pradeepg19, Pramodpanda, Prashanthns, Prenju, Private Butcher, Quantpole,Qwghlm, R.O.C, R0pe-196, RJaguar3, Rachael0008, Rajankila, Ray Chason, Razorflame, Rcpettit, Reagan2234, Red star, RedHillian, Requestion, RexNL, Riana, RichardF, RickK, RoadWizard, Robertson-Glasgow, Rocket71048576, Roland Kaufmann, Router, Rwil02, S3000, Said531982, Saileshrh, Saklani, Sam Hocevar, San rane84, Sandahl, Saptarshimasid, Sardanaphalus,Scientizzle, Scohoust, Sevela.p, Shadowjams, Shanes, Shanken, Shawn in Montreal, Simon123, SimonP, Sjforman, Sjö, SkerHawx, Smallbones, Smorter, Smyth, Spellcast, Spencer, SpuriousQ,Squids and Chips, Stephenb, Stepheng3, Steven Zhang, Streque, SueHay, Suhail Ambrose, SunCreator, Sundar77, Supergeo, Swerfvalk, Tassedethe, TastyPoutine, Taxman, Techman224, Tedder,Tesfatsion, The Cunctator, The Transhumanist, Thedrooling, Theresa knott, Thomas the tom, Tiger888, Toalewa98, Torrentweb, Tra, Triona, Truthflux, Ttmmblogger, Twigletmac, UKbandit,Ubhudia, Urbanrenewal, Utility Monster, VasilievVV, Vegas949, Versageek, Veyklevar, Violetriga, Viriditas, Walkerma, Waltpohl, Wavelength, Wikicontra, Wikilibrarian, Wikinvestor,Wmahan, WojPob, Wolfman, Woohookitty, Wordsmith, Work permit, Writemeister, Wtmitchell, XTooksx, Yair rand, Yhkhoo, Yidisheryid, Youssefsan, YuriyGorlov, Zandergraphics, Ztbs1000,1083 anonymous edits

Financial services  Source: http://en.wikipedia.org/w/index.php?oldid=362562789  Contributors: 16@r, AJCham, Aitias, Alast0r, Ale jrb, Alphaxer0, Amolshah, Andre999, Antiliby, Arcenciel,Ashwin palaparthi, Barkeep, Barticus88, Beetstra, Ben5082, Bobblewik, Boing! said Zebedee, BowChickaNeowNeow, Boyd Reimer, ButtonwoodTree, Calltech, Cameron Scott, Can't sleep,clown will eat me, Carabinieri, Cavrdg, Ceyockey, Chendy, Chris the speller, Chumki91, Clarkk, Cmdrjameson, Corza, CrazyTalk, Crocodile Punter, D6, DESiegel, DMCer, Damian Yerrick,Darkedict, Darkieboy236, Davewho2, Deetdeet, Diasimon2003, Dougak, Dr Gangrene, ERcheck, Edward, Elfguy, Feco, Finance C, FireballDWF2, Fireblae, FisherQueen, Gabz80, Gadfium,Gaius Cornelius, Ginkgo100, Gnomeliberation front, GraemeL, Greensburger, Gregalton, Gwernol, Haamster, Hagbard13, Halcatalyst, Hchizik, Headbomb, Hmains, Hydroshock, InShaneee,IvanLanin, Jattaway, Jburchard1, Jcembree, Jernoult, Jerryseinfeld, JiFish, Jiang, Jkeene, Jmmbc, Johnmccollim, Joodferl, Joseph Solis in Australia, Jwestbrook, Kaihsu, Kauczuk, Kenb215,Ketiltrout, Koavf, Kuru, Lars Washington, Lee S. Svoboda, Lenxlin, Leonard^Bloom, Lifnlsdlsdnf, Linkspamremover, Luk, Lukobe, MBisanz, MER-C, Melmunch, Michael Hardy, Modster,Naive rm, NinjaKid, Noisy, Notinasnaid, Nurg, Ombudsman, Orina22, Patriotfootball, PeterSymonds, Pgreenfinch, Pixeltoo, Psb777, Pvosta, RBBrittain, RainbowCrane, Ramymora, RexNL,Rgnewbury, Rich Farmbrough, Rich257, Ronz, Rossi27530, Roue2, Saga City, Sam Hocevar, Scottk, Sebastian scha., Secretlondon, SheffieldSteel, Sietse Snel, Simon123, Sjakkalle, Sloman,Spike Wilbury, Srl, Susanjane102, Targeman, TerraFrost, Themightyrambo, Thingg, Tigeron, UnitedStatesian, Uris, Uvaduck, Vegas949, Vivenot, WereSpielChequers, WikHead, Wiki wikipedia lets go, WikiDon, Woohookitty, Wsubob, Www.crossprofit.com, Zedla, Zhenqinli, 222 anonymous edits

Personal finance  Source: http://en.wikipedia.org/w/index.php?oldid=366610866  Contributors: 05runner, 1wealthbuilder, Aaron Brenneman, Al Wiseman, Alexandermin, Alonhu, Altenmann,Andman8, Anetode, Antonwg, Assetprotectioninformation, BD2412, Barek, Ben5082, Bonadea, Bstroh, Caffeine induced78, Captain-tucker, Cassandra21st, Catalina-symbina, Chivista, ChuckMarean, CliffC, Clpo13, Darkside05, Dezmo22, Dpodley, Dqmillar, El C, Elisalucia, F15 sanitizing eagle, Fcfc, Feco, Finbarr Saunders, Funandtrvl, Futerica, George Carlin Fan, Gregalton,Gwernol, Hadal, Headbomb, Hmu111, ImperfectlyInformed, Investored, J.delanoy, J8jwiki, Jahiegel, James Sa, Jerryseinfeld, JimmyCor, Jjswanso, JoeSmack, Johnlowe78, Joy, Jrleighton, JustAnother Dan, JustThrive, Justrick, Kashi0341, Katandrkatandr, Kl4m, Kodos R, Kozuch, Kuru, LazyLizaJane, MER-C, Marianna1407, Matsiltala, Michael A. White, Microcell, Millerz1897,Miracle33, Myattorneyblog, Mydogategodshat, Mykjoseph, NeilN, Nivix, Noddycr, Ohnoitsjamie, Ooper01, Parkerkev, Personalfinance, Pfblogger, PhileasLaville, Pintuhs, Psyclepump, R.O.C,Sardanaphalus, Sastagour, Shanes, Siakhooi, Silsor, SimonP, SiobhanHansa, Spalding, Spidermedicine, Stephenb, Surya3716, Syrthiss, Takeel, Tangerines, TastyPoutine, Template namespaceinitialisation script, The Transhumanist, Themainleader, Thinktwins, Tonync, TruHeir, Vary, Versageek, VladimirKorablin, Vt-aoe, Wimt, Wronguy, Yintan, Yulracso, Zhaff, ZimZalaBim,Zodon, Zrosen2, Zzuuzz, 149 anonymous edits

Corporate finance  Source: http://en.wikipedia.org/w/index.php?oldid=369560603  Contributors: A8UDI, Alsandro, Amjad120, Andman8, Anwar saadat, Arjan1071, BD2412, Barek, Beetstra,Bmarmie, Bookboon, Buyoof, Can't sleep, clown will eat me, Canterbury Tail, Capecodeph, CharlotteWebb, Cherkash, Chrisvls, Ckatz, Colonies Chris, DMS, DanielDeibler, Dantadd, Ddr,Ding.iitk, Discospinster, DocendoDiscimus, Dpr, Dsol, Dumdude, ENeville, EagleFan, Elfguy, Enchanter, FactsAndFigures, Feco, Fieldday-sunday, Finance C, Financeeditor, Fintor, Furrykef,Gaius Cornelius, Gilliam, Globalprofessor, GoingBatty, Grafen, Graham87, Gregbard, Guy M, Gwernol, Haffen, Headbomb, Hu12, Igor101, J.delanoy, Jafcbs, JamesAM, JaquiB, Jeff3000,Jerryseinfeld, Jessy062811, Jessy062811-NJITWILL, Jinglesss, John Fader, Johnleemk, Jwestland, Kered1954, Khmarks, Kozuch, Kuru, Lamro, Lewislams, LittleOldMe, Lucky627627,M3taphysical, MER-C, Manaskumar, Mauls, Maximus Rex, Meandmyself, MementoVivere, Mhardwicke, Michael Hardy, Mitsuhirato, MrOllie, Mwanner, Mydogategodshat, Nagika, Nanocho,NellieBly, No1lakersfan, Nstse, Ohnoitsjamie, Paranoid, Paul A, Pgreenfinch, Polyextremophile, Pouya, RJN, Reinoutr, Rjwilmsi, Ronz, Rwil02, Sandymok, Shanes, Silly rabbit, Smallbones,Struway, SueHay, Svetovid, Taxman, The Transhumanist, Tiger888, Truthflux, UnitedStatesian, Urbanrenewal, Walor, Woohookitty, Yonidebest, Yowkien, ZimZalaBim, 320 anonymous edits

Financial capital  Source: http://en.wikipedia.org/w/index.php?oldid=364060741  Contributors: Aaronbrick, Andre Engels, Anwar saadat, Bequw, Christian List, Crzycheetah, Ddxc, Docu,EagleOne, Enchanter, Finnancier, Frank, Fratrep, Gregalton, Gurch, Headbomb, ImperfectlyInformed, Joowwww, Jusjih, Luís Felipe Braga, Lycurgus, MartinHarper, Maurreen, Max rspct, MildBill Hiccup, Mydogategodshat, Ncravens, Nilmerg, Nirvana2013, NotAnonymous0, Olivierchaussavoine, Paine Ellsworth, Pgreenfinch, Piano non troppo, Pjacobi, Pnm, RedWolf, Richard D.LeCour, Roadrunner, Robertson-Glasgow, Robina Fox, Saintswithin, Salamurai, SimonP, Sjö, Sylvain Mielot, Uogl, Wavelength, Zain Ebrahim111, 60 anonymous edits

Cornering the market  Source: http://en.wikipedia.org/w/index.php?oldid=366739084  Contributors: Ajb, AngoraFish, Anne97432, Axeman89, Bernard S. Jansen, Blue Tie, Dman727,DocendoDiscimus, Dr. Slide, Edward, Elroch, Groyolo, Gwern, Gzornenplatz, Headbomb, Hooperbloob, Infrogmation, IronStranger, JAF1970, Jeffreymcmanus, Joyous!, Jweiss11, Kbthompson,Kwertii, Lamro, Maury Markowitz, Narsil, NorrYtt, Prumpf, RayBirks, Rickrossistheboss, SueHay, TheFutureIsComing, Whiskeydog, 31 anonymous edits

Insurance  Source: http://en.wikipedia.org/w/index.php?oldid=369874383  Contributors: -Midorihana-, 16@r, 24.5.153.xxx, A Softer Answer, A. B., AAAAA, Abrandvold, Actuarial disco boy, Adashiel, Addihockey10, Aeklein, Ahadisnain, Ahoerstemeier, Aitias, AjaxSmack, Alai, Alan Liefting, Alansohn, AlasdairGreen27, Albatross2147, Alexjones9281, Allstateowego, Alphachimp, Altenmann, Amatulic, Amplitude101, Andres, Andrewpmk, Andycjp, Andystyart, AngelOfSadness, Angela, Anhydrobiosis, Anoops, Antandrus, Anuradhaarandara, Anwar saadat, Aoso0ck, Aratuk, Arden, Argon233, Armeria, ArmyOfFluoride, Arnobarnard, Arsenikk, Artichoke-Boy, Augfan77, Avraham, AxelBoldt, BC Graham, BD2412, Being blunt, Ben Ward, Benjasmine, Bezking, Bgs022, Bhadani, Bhagwatkumar, BibleThumper4 3rdHeaven&Earth, BigNate37, Bill.albing, Bill37212, Binoy211, Biscuittin, Bk0, Blurpeace, Bobdavis4, Bobo192, Bogdangiusca, Boomsma, Booyabazooka, Bradmca, Bronayur, Bryan Derksen, Bubba73, BuickCenturyDriver, Bunthorne, Butnotthehippo, CRoetzer, Cacophony, Caesar1951, CalebNoble, Calltech, Calmer Waters, CambridgeBayWeather, Can't sleep, clown will eat me, CanadianLinuxUser, CanisRufus, CapitalR, CapitalSasha, Capricorn42, Casey Abell, Ccwaters, Cedced1, ChangChienFu, Chasingsol, Chills42, Chinsurance, Choppie, Chris the speller, Chuunen Baka, Cjmnyc, Cleanupman, Cleared as filed, CliffC, ClockworkSoul, Closedmouth, CodeWeasel, Cometstyles, Commander, Commander Keane, Conny, Conversion script, Cooksey, Coolcaesar, Corp Vision, Courcelles, Crazycomputers, Crd721, Crystalball, Czalex, DH85868993, DJ Craig, DS1953, DabMachine, Dale Arnett, Danielroberts, Dannyaa, Dano1970, DarthVader, Davidprior, Dcflyer, Dekisugi, Derbyadhag, Deror avi, Dharmasattva, DiggyStyle, Dip2007, Disavian, Discospinster, Dispenser, Dissento, Dkutcher, Dlobovsky, Dom stapleton, DoomsDay349, Dozen, Dpdrummer14, Dpr, Drewwiki, Drivewest, Dudester, Dunwoody01, Dxroaddogg32, Dysprosia, ESkog, EagleEye96, EastTN, Ebrenner8, Edcolins, Edgerunner, Edivorce, Eiland, Either way, ElKevbo, Electrolite, Elf, Ellsworth, Ellywa, Emersoni, Eminently insurable, Enchanter, Epbr123, Erdemkoc, EthanLeduc, Everyking, Evil saltine, Ewlyahoocom, Explicit, Fabricationary, Famspear, Faperez, Femto, Fengshui88, Fffwmg, Filanca, Flyguy649, Funandtrvl, Furrykef, FusionNow, Futurebird, Fuzbaby, G716, Gadfium, Galactor213, Galoubet, Garion96, Gary King, Gaviidae, Geni, Ghingo, Gilbo32, Gima72, Giraffedata, Goequinox, Gogo Dodo, Golbez, GraemeL, Graham87, GreatWhiteNortherner, GreenReaper, Grim23, Grouse, Gurchzilla, Gwernol, Gzkn, Hadal, Halsteadk, Hamiltonstone, Hansjorn, Hdt83, Headbomb, Helixweb, HenryLi, HeteroZellous, Hkthomson, Hmains, Hoho, Hooperbloob, Hroðulf, Hu12, Hukdupcivic, Husond, I already forgot, I do not exist, II MusLiM HyBRiD II, Ian Pitchford, IcedNut,

Article Sources and Contributors 89

ImperfectlyInformed, Insure110, Intgr, Intrigue, Iridescent, Itai, Izaacsmall, J.Marlowe, J.delanoy, J2rome, JForget, JPatrickBedell, JaGa, Jackfork, Jackrober, James Daily, James R. Ward,Jamieeeeeeeeeeee, Janto, Jaxl, Jayjg, Jeffrey Mall, Jerryseinfeld, Jfdwolff, Jiang, Jirka62, Jk312728666, John Quiggin, John wesley, Johnwhunt, Jojalozzo, Jonathan.s.kt, Jonhol, Joseph Solis inAustralia, Josephbrophy, Jublee18, Judicatus, Juicydave, KMcD, Kaos Klerik, Katefan0, Kbh3rd, Kdc3, Kevindy, Khushal.rakesh, KiddoKiddo, Kilmer-san, Kingjubbs, Kingpin13, Kingturtle,Kjramesh, Klonimus, KnightRider, KnowledgeOfSelf, Koavf, Krich, Kshpitsa, Kukini, Kuru, Kwansanbook, KyraVixen, Lee Daniel Crocker, Leithp, Levineps, Licardo, LilHelpa,Linkspamremover, Liopa, Logictheo, Lolaraa, Longevityquotes, Lord Pistachio, Louisrix, Lumbercutter, LymphToad, Lyseong, M7, MER-C, ML5, MLBplayer456, MPerel, Madines, Mani1,Manishgh, Marc Venot, Martin451, Martinp23, Martpol, Maslakovic, Matusz, Maximus Rex, McTavidge, Mcrossdc, Meerafeedback, Megaboz, Meiers Twins, Melmunch, Mfhbrown, Mic,MidnightSwinga, Mike Teflon, MindstormsKid, MisterCharlie, Mmmbeer, Mnacht, Monkeyman, Mozzerati, Mr. Wheely Guy, MrHen, MrOllie, Msm18, Mtgkooks, Muchness, Mulconrey,Musiphil, MutantPlatypus, Mwanner, Myasuda, N5iln, N8chz, Nakon, Narykids, Nastajus, Natrajdr, Nellis, NigelR, Nikai, Nishanttak22, Nlu, Nomad2u001, Nopetro, Nowa, Nudecline,Nukeless, Numbersinstitute, Nuno Tavares, Nv8200p, Oberiko, Octahedron80, Ohms law, Ohnoitsjamie, OlEnglish, Ombudsman, Omicronpersei8, OneOfABullet, Optichan, Ossifer,Otisjimmy1, Out of Here, Outriggr, OwenX, Oxymoron83, Pakaran, Patrick, PatrickReno, Paulmeisel, Pax:Vobiscum, Peraphan, Perry Kundert, Peter Ngan, Petersud, Pevarnj, Pgk, Phgao,PhilKnight, Philip Trueman, PhotoJim, Pnm, Praddy06, Preetsibia, Probablytrue, Psycho Kirby, Pupeyvelo, Quadpus, RFerreira, RLamb, Radbug, RainbowOfLight, Rawmustard, Rb82,Rcherrick, Rdsmith4, Reedy, Reggy73, Rescuechick, Retired username, Reym123, Rich Farmbrough, Rich257, Richardcavell, Rjd0060, Robert Fraser, Rock2e, Ronhjones, Roue2, Roxymurphy,Ryuch, SJP, SNIyer12, SWAdair, Saga City, Sal2010, Samlivingstone, Sc3499a, SchfiftyThree, Sdterry, Seanmfitz59, Seattleraincity, Secretmessages, Sehsuan, Sewings, Sfaridi, Sfmammamia,Shadow1, Shangrilaista, Shashuec, Shawnc, Shienhendry, Shoefly, Shustov, Sidewinder1, Simesa, SimonP, Sionus, Sjö, Skid21, Sloman, SmartGuy, Smyth, Snacky, Somno, Sophie, Specious,Sporadikos, Springbreak04, Srinikasturi, Stars4change, Startswithj, SteinbDJ, StephanCom, StephenMacmanus, Stephenb, Stephrigu, Stickee, Stuartclark1, Stumps, Subikar, Super edd,Suwarnaadi, Svendsgaard, Svetovid, Swamp Ig, Swizzlez, Symbiote, Symonweedon, Synergy, Tad Lincoln, Tanthalas39, Taxman, Tempshill, TenOfAllTrades, The Thing That Should Not Be,Thegn, Therearewaytoomanybooksinhere, Thingg, Thirdreading, Threepwood89, Tide rolls, TimBits, Tippling.philosopher, Tjah ajoeku, Tony Corsini, Tristanreid, Trusilver, Tsagilistic,Tukanglotek, Twaz, Tweed-Lover, Uberimaefidei, Valkyryn, Vasiura, Versageek, Versus22, VirtualDelight, Vkem, Voyagerfan5761, Ward20, Wavelength, Wclark, Weaselword,Whatsthatbluething, Whilding87, WikiLaurent, Wikicide, Wikidea, Wine Guy, Wintonian, Woggly, Woohookitty, Worldwide historian, Wutsje, X201, Xboxfreak, Xezbeth, Xiahou, Yamla,Yaromunna, Yidisheryid, Yintan, Yonatan, Yosri, Yourkey, Zains, Zeaner, Zedla, Znatok, Zoso Jade, Zzuuzz, 1105 anonymous edits

Derivative  Source: http://en.wikipedia.org/w/index.php?oldid=368549524  Contributors: 49oxen, A. Parrot, A. Pichler, Aecis, Alastair Carnegie, Ale jrb, Aleator, Alex 686, Altruism, Amatulic,Analoguni, AndrewHowse, Anomalocaris, Ask123, Aude, Babbage, Berland, Bhuna71, Bigfatloser, BigrTex, Bobblewik, Bonewith, Bryan Derksen, Btangren, Buddha24, C960657, CSWarren,Caissa's DeathAngel, Calibas, Caltas, Canadaduane, Carax, Chenyu, Chokoboii, ChowSheRuns, Chris Howard, CliffC, Cometstyles, Conversion script, Coolninad, CorvetteZ51, Crasshopper,Cyrius, DMCer, Dami99, Dan131m, DanielVonEhren, Deanlwiley, DerivMan, Derivativeslawyer, Dirnstorfer, DocendoDiscimus, Donnabuck, Drdariush, Drphilharmonic, EBespoke, Edward,Ehrenkater, Eloz002, Equendil, Erdosfan, Ernie shoemaker, Esb, Evitavired, Eyreland, FBIMON, Falcon8765, Fastfission, Feco, Fenice, Finnancier, Fishiswa, FreplySpang, GLeachim,Gandalf61, Gansos, Gary King, Gianetta69, Ginette.lacroix, Glennchan, GodfatherOfFX, GraemeL, GreatWhiteNortherner, Gregalton, GregorB, Gregpalmerx, Grick, Gugustiuci, Hadal, HairyDude, HamburgerRadio, Headbomb, Helvetius, Hippodrome, Historymike, Hossain Akhtar Chowdhury, Htournyol, Hu12, Huey45, Iitkgp.prashant, IstvanWolf, Istvánka, IvanLanin, JMSwtlk,Jarettlee, JayJasper, Jberkes, Jerryseinfeld, Jfeckstein, Jgard5000, JidGom, Jivee Blau, Jmnbatista, Jni, Johann Wolfgang, John Fader, Jrleighton, Jvs.cz, Jóna Þórunn, Kchishol1970, Keving 65,Kku, Klp02gtm, KnowledgeEngine, Kummi, Kwertii, Landroni, Lerdsuwa, Levineps, Lfchuang, Lotje, Lotusv82, M1ss1ontomars2k4, MER-C, Makrem.boumlouka, Manikongo, Marcika,MartinDK, Mastermund, Mausy5043, Mav, Mdeckerz, Medeis, Meg Bill, MementoVivere, Mic, Michael Hardy, Mishall1281, Misterx2000, Mitsuhirato, Mmaher, Mnmngb, Mo0, Modemrat,MrOllie, Mu5ti, Murphman67, Mydogategodshat, Nameweb, Narssarssuaq, NawlinWiki, Nbarth, Netsumdisc, Newyorxico, Nguyen Thanh Quang, NipponBanzai! po-mo irony, Nirvana2013,Niteowlneils, Nk, Notinasnaid, Notmyrealname, Nowa, OTCSF, Odie5533, Ohnoitsjamie, Olegwiki, Orrorin, Oxymoron83, PCock, Palindrome101, Pcb21, Ph.eyes, Phaldo, Philip ea, Phillipb81,Piano non troppo, Piotrus, Plinkit, Ploufman, Portsaid, Proofreader77, Purplehaziness, QUEWWW, Qaddosh, Quaeler, Question: Are you being served?, RAJESHVK, Rachael0008, Rajah,Rajeshc85, Rajusom, Rangedra, RayBirks, RedWolf, Renamed user 4, Rich Farmbrough, Rich257, Rinconsoleao, Rjwilmsi, Road Wizard, Roadrunner, Robwingfield, Ronny8, Rosasco, RxS,Ryan O'Rourke, S0uj1r0, SEOCAG, SJP, Salsb, Salt Yeung, Sandolsky, Sardanaphalus, Sarma.bhs, Satori Son, Sdrozdowski, Sebrenner, Sekicho, Sgcook, Shadiakiki1986, ShaolinGirl,Shua2000, SimonP, Smallbones, SmartGuy, Starwiz, SteinbDJ, StephenRH, Steven Zhang, Stevenmitchell, StoptheDatabaseState, Strangnet, Superm401, Swapspace, Swerfvalk, Sybren,TastyPoutine, Taxman, TerriersFan, Texmex81, TheSix, Themindsurgeon, Tide rolls, Tiger888, To Serve Man, TonyWikrent, Trade2tradewell, Trasel, Tresiden, Treznor, Tufflaw, TylerFinny,Typelighter, Ultrasolvent, UnitedStatesian, Urhixidur, Usenetpostsdotcom, Utcursch, Vald, Veinor, VodkaJazz, Welsh, Whiskey Pete, Wik, Wikiklrsc, Wikomidia, Willsmith, Wk muriithi,Wonderstruck, Wortoleski, Wyattmj, Xp54321, Yamaguchi先生, Zaq100, ZimZalaBim, Zven, 647 ,ينيبرشلا دمحم anonymous edits

Public finance  Source: http://en.wikipedia.org/w/index.php?oldid=369350154  Contributors: 1958publius, Aaustin, Afdoug, Ajdz, Andman8, AndonicO, Andrejj, Andycjp, Anwar saadat,Baronnet, Barticus88, Blue-Haired Lawyer, Cag244, Caltas, Cameron Scott, Camw, Can't sleep, clown will eat me, Chanler, Cynical, Cyrius, Da monster under your bed, DocendoDiscimus,Doopdoop, Eastlaw, Feco, Fosforo18, Fredrik, GB fan, Gangstories, Headbomb, Hebrides, Henrygb, Herbs505, Hmu111, Hu12, Jerryseinfeld, Khalid hassani, Koczy, Kozuch, Krasnoya, Kuru,Latka, Lucca.Ghidoni, Lunchscale, Marija Toshevska, Michael Devore, Michael Hardy, Morphh, Mr. Billion, Mydogategodshat, Neutrality, Notinasnaid, Passargea, PeterEastern, Petr Kopač,PhatJew, PrinceVikings, R'n'B, Rinconsoleao, Sabine McNeill, Sardanaphalus, Shandris, ShaunMacPherson, Shizhao, Sic6sic, Sovereignpeoples, Summit84, Template namespace initialisationscript, The Transhumanist, Thomasmeeks, Tide rolls, TrentonLipscomb, Versageek, Wikidea, Yahel Guhan, 91 anonymous edits

Financial economics  Source: http://en.wikipedia.org/w/index.php?oldid=369465248  Contributors: Acroterion, Alansohn, Aleksd, AndrewHowse, Bigboss88, Bluemoose, Bryan Derksen,Calltech, Canterbury Tail, Christofurio, Ckways, Cretog8, David 5000, DocendoDiscimus, Dori, Edward, Ej463, Enchanter, Examtester, Exeunt, Fenice, Fintor, Forich, Funandtrvl, Gary King,Gogo Dodo, GraemeL, Grafen, Hadal, Headbomb, Ia1998, JDMBAHopeful, JForget, JHP, Jerryseinfeld, John Quiggin, Johnleemk, Koringles, Kuru, Mic, Michael Hardy, Morphh,Mydogategodshat, NJGW, Nihilozero, Nobellaureatesphotographer, Olimpiu stefan, Pgreenfinch, Pnm, Portutusd, Postdlf, Protonk, Rbaliq, SDC, Sardanaphalus, Shanes, SimonP, Smee,StaticGull, Tank bund, Taxman, Template namespace initialisation script, Tesfatsion, Thomasmeeks, Tiger888, Torrentweb, Wesley, Zbodie, 82 anonymous edits

Financial mathematics  Source: http://en.wikipedia.org/w/index.php?oldid=369552229  Contributors: A.j.g.cairns, Acroterion, Ahd2007, Albertod4, Allemandtando, Amckern, Angelachou,Arthur Rubin, Author007, Avraham, Ayonbd2000, Baoura, Beetstra, Billolik, Btyner, Burakg, Burlywood, CapitalR, Cfries, Christofurio, Ciphers, Colonel Warden, DMCer, Drootopula,DuncanHill, Eric Kvaalen, Fintor, Flowanda, Gabbe, Gary King, Gene Nygaard, Giftlite, Giganut, HGB, Halliron, Hannibal19, Headbomb, Hroðulf, Hu12, Hégésippe Cormier, JBellis, Jackol,Jamesfranklingresham, Jimmaths, Jmnbatista, JonHarder, JonMcLoone, Jonhol, Jrtayloriv, Kaslanidi, Kaypoh, Kimys, Kolmogorov Complexity, Kuru, Langostas, MER-C, MM21, MichaelHardy, Michaltomek, MrOllie, Niuer, Nparikh, Oleg Alexandrov, Onyxxman, Pcb21, PhotoBox, Pnm, Portutusd, Punanimal, Quantchina, Quantnet, Ralphpukei, Rhobite, Riskbooks, Ronnotel,SUPER-QUANT-HERO, Sardanaphalus, Secretmessages, Sentriclecub, Silly rabbit, SkyWalker, Smesh, Stanislav87, Tassedethe, Tigergb, Timorrill, Uxejn, Vabramov, Vasquezomlin,WebScientist, Willsmith, Woohookitty, Xiaobajie, YUL89YYZ, Yunli, 164 anonymous edits

Experimental finance  Source: http://en.wikipedia.org/w/index.php?oldid=336742680  Contributors: Bluestreek, Funandtrvl, Gavin.collins, Headbomb, Jesse projet, Marcika, MastCell, Ofol,WilyD, 5 anonymous edits

Behavioral finance  Source: http://en.wikipedia.org/w/index.php?oldid=368997424  Contributors: APH, Ahd2007, Amritasenray, Ascorbic, Asubrahm, BAxelrod, Beetstra, Bender235, BrickThrower, Butko, C4duser, Calltech, Causa sui, Clefticjayjay, Coughinink, Countrydoc1, Cretog8, DCDuring, DanMS, DarwinPeacock, Davewho2, DavidCBryant, Dedekinder, Dukealum,EcoMan, EconoPhysicist, EdBever, Edward, El C, Electrosaurus, EntmootsOfTrolls, EvanHarper, Examtester, Faizul Latif Chowdhury, FastLizard4, Fintor, Francob, Funandtrvl, Gadfium,Gainslie, Gaius Cornelius, Gary King, Geniac, Gowish, Grayscale, Ground, Gwernol, HalfDome, Headbomb, Hu12, Iakov, Ignatzmice, J Spratt, JDMBAHopeful, JHP, Jaccos, Jackzhp,Jarry1250, JenLouise, Jerryseinfeld, Jersey emt, Jfeckstein, JiveAlive5, John Quiggin, Johnkarp, Johnleemk, JzG, KLLvr283, Kai-Hendrik, Kickyandfun, Kk777, Koczy, Kpe, Lfstevens,Lockesdonkey, Lomoruth, Lucasreddinger, MER-C, MLCommons, Madchester, Madcoverboy, Markory, MartinPoulter, MastCell, Maurreen, Mdz, Meredyth, Michael Hardy,Michael.schifferdecker, Midiom, Mlpearc, Morphh, Mydogategodshat, Mysdaao, Nakos2208, Nbearden, Netsumdisc, Nick UA, Nirvana2013, Ofol, Oparadoha, Opop5757, Otto ter Haar,Outback the koala, Palma 01, Palmcluster, Pamri, Paranoid, Parisab, Paulscho, Pgreenfinch, Piotrus, Psychobabble, Pushmedia1, Pwarnock, Quantpole, Quiddity, Radagast83, Rajeevthakkar,Randomtime, Rgfolsom, Richmeister, Rieger, Rinconsoleao, Rjwilmsi, SUPER-QUANT-HERO, Sajishgp, Sam Hocevar, Shaddack, Sky20nyc, Skywalker415, Slightlyslack, SmartGuy, Solitude,Solphusion, Some standardized rigour, Southwestpaw, Sposer, Squids and Chips, StaticGull, Streque, Supernova new, Szalagloria, Szstanley, Taak, Tekks, Tesfatsion, Thaimail, The wub,Thomasmeeks, Thrasibule, Tide rolls, Tobacman, Torrentweb, Trade2tradewell, Trialsanderrors, VKokielov, Van helsing, Vmenkov, Wmahan, Wttsmyf2, Xcvb2010, Ztbs1000, Zzuuzz, 255anonymous edits

Intangible asset finance  Source: http://en.wikipedia.org/w/index.php?oldid=354875350  Contributors: Amoorman86, AndrewHowse, Bender235, Fuhghettaboutit, Funandtrvl, Gaius Cornelius,Headbomb, IA Finance Type, Jeff3000, Mr pand, Pwnage8, Quercus basaseachicensis, RHaworth, Rjwilmsi, Woohookitty, 7 anonymous edits

Image Sources, Licenses and Contributors 90

Image Sources, Licenses and ContributorsFile:2005private sector credit.PNG  Source: http://en.wikipedia.org/w/index.php?title=File:2005private_sector_credit.PNG  License: Public Domain  Contributors:User:Anwar_saadat/bubble_maps_(FAQ)Image:2006net capital export.PNG  Source: http://en.wikipedia.org/w/index.php?title=File:2006net_capital_export.PNG  License: Public Domain  Contributors:User:Anwar_saadat/bubble_maps_(FAQ)Image:2006net capital import.PNG  Source: http://en.wikipedia.org/w/index.php?title=File:2006net_capital_import.PNG  License: Public Domain  Contributors:User:Anwar_saadat/bubble_maps_(FAQ)File:2008-07-23 Wrecked car in Durham 2.jpg  Source: http://en.wikipedia.org/w/index.php?title=File:2008-07-23_Wrecked_car_in_Durham_2.jpg  License: GNU Free DocumentationLicense  Contributors: User:SpeciousFile:NHS NNUH entrance.jpg  Source: http://en.wikipedia.org/w/index.php?title=File:NHS_NNUH_entrance.jpg  License: GNU Free Documentation License  Contributors: Bhoeble,FrancisTyers, 2 anonymous editsFile:Tornado Damage, Illinois 2.JPG  Source: http://en.wikipedia.org/w/index.php?title=File:Tornado_Damage,_Illinois_2.JPG  License: Creative Commons Attribution-Sharealike 2.5 Contributors: User:RklawtonFile:2005life premia.PNG  Source: http://en.wikipedia.org/w/index.php?title=File:2005life_premia.PNG  License: unknown  Contributors: V2kFile:2005nonlife premia.PNG  Source: http://en.wikipedia.org/w/index.php?title=File:2005nonlife_premia.PNG  License: unknown  Contributors: V2kImage:Chicago bot.jpg  Source: http://en.wikipedia.org/w/index.php?title=File:Chicago_bot.jpg  License: unknown  Contributors: Infrogmation, JeremyA, Leslie, Yonatanh, 1 anonymous editsImage:Total world wealth vs total world derivatives 1998-2007.gif  Source: http://en.wikipedia.org/w/index.php?title=File:Total_world_wealth_vs_total_world_derivatives_1998-2007.gif License: Public Domain  Contributors: User:AnaloguniImage:2006budget income.PNG  Source: http://en.wikipedia.org/w/index.php?title=File:2006budget_income.PNG  License: Public Domain  Contributors:User:Anwar_saadat/bubble_maps_(FAQ)Image:General_Government.jpg  Source: http://en.wikipedia.org/w/index.php?title=File:General_Government.jpg  License: Creative Commons Attribution-Sharealike 3.0  Contributors:User:Cag244Image:Public_Sector.png  Source: http://en.wikipedia.org/w/index.php?title=File:Public_Sector.png  License: Creative Commons Attribution-Sharealike 3.0  Contributors: User:Cag244

License 91

LicenseCreative Commons Attribution-Share Alike 3.0 Unportedhttp:/ / creativecommons. org/ licenses/ by-sa/ 3. 0/