TOPIC: FINANCIAL MANAGEMENT 2.

FINANCING DECISION ADVANTAGES OF PROFIT

FUNCTION
DEFINITION:
Financial management is the study of
money related decision. Where it basically
involved planning and controlling the
financial resources.
Is to deciding on how to finance the
assets that required by the firms.
It is determining composition
liabilities such as debt, equity and
retained earned.
3. ASSET MANAGEMENT
DECISION
MAXIMIZATION
 Easy to calculate the profit
 Easy to determine link between the
financial decision and profit
DISADVANTAGES OF PROFIT
MAXIMIZATION

Where the planning and controlling to Assets or resources management

ensure the financial resources is used to
profitability, efficiently and effectively.
ROLE OF MANAGER:
1. INVESTMENT DECISION
The total amount of assets that held
by the firm where they decide on
how many asset to buy? What asset
to buy? And what type of asset they
want to buy?
 Emphasize short-term
decision.
 Ignore risk and uncertainty
Management of current is
 Ignore timing return
efficiently and effectively.
 Require immediate resources
PROFIT MAXIMIZATION
AFFECT MANAGERIAL BEHAVIOR
Is focus on short time earning
 Managerial compensation plan
SHAREHOLDER WEALTH  Direct intervention by shareholders
MAXIMIZATION
 The threat of firing
Focus on increasing the overall value of  The threat of takeover
business entity over time?

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 PROBLEM BETWEEN
SHAREHOLDERS AND MANAGER

The shareholder is the owner of the

business and the manager is hired people
by the shareholder.

The problem is when the manager act like

their own the business and make their own
decision on maximize the business wealth
where it suppose the shareholder who
make the decision and maximize the
wealth of the business.

Secondly is where sometimes the manager

tend to give away the corporate earning to
their favourite charitable institution for
glory and personal satisfaction.

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TOPIC: RISK MANAGEMENT –
DERIVATIVES
DEFINITION
Derivatives instrument is the financial
instrument that derive their value from the
value of an underlying assets
It holds the little value and the entire value
is dependent on the underlying assets
TYPES OF UNDERLYING ASSETS
DERIVATIVES CONTRACT TRADED risk management of assets and
BY BMDB portfolio
 Commodity Derivatives 2. SPECULATORS
o Gold These are individuals who take a view
o Oil on the future direction of the markets.
o Tin They take a view whether the prices
 Equity would rise or fall in the future and
o SSF accordingly to buy or sell futures and
o Index Future option to try and make a profit from the
future price movements of the
 Financial
underlying assets
o Bond
3. ARBITRAGEURS
o Interest Rate Future
They take positions in financial
CATEGORIZES MAIN PLAYER IN markets to earn riskless profit. It take
THE DERIVATIVES MARKET short and long positions in the same
different contract at the same time to
1. HEDGERS
create a position which can generate a
These are investors with a present
riskless profit.
exposure to the underlying assets is
subject to price risks. It use the
derivative market primarily for price
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 ADVANTAGES AND
DISADVANTAGES OF
ADVANTAGES AND EXCHANGE TRADED
DISADVANTAGES OF OVER A
ADVANTAGES DISADVANTAGES
COUNTER  Lower  Customization

ADVANTAGES DISADVANTAGES transaction not possible

 Customization  More costly cost  Some basic risk
possible  Not liquid  No arising from
 Can fully hedge  Cannot be counterparty mismatch in
a position reversed/offset risk asset, quality,
 Can be tailored  Market maturity and size
for specific clearing prices is possible
needs