MIT OpenCourseWare Finance Course Introductory Lecture

Course Overview

• The course initially offered last year for 6 credits with one session per week.
• Based on positive feedback, expanded to 12 credits with sessions twice a week on Tuesdays and Thursdays.
• Main instructors: Jake Shaw, Dr. Vasili Estrella, Peter Kempthor, and Dr. Chunbong Li.
• New math lectures added covering linear algebra, probability, statistics, and stochastic calculus.
• Course aims to demonstrate how mathematics is applied in modern finance.
• Outcomes: Some students from last year joined the finance industry.

Lecture Introduction

• The lecture provides an introduction to financial markets and terminologies.
• Initial questions to understand the audience's background (undergraduate, graduate, finance and business majors, etc.).
• Encouragement for students from other universities to attend.

Key Financial Concepts and Market Overview

Financial Market Basics

• Markets facilitate trading: initially for goods, then centralized exchanges for stocks and futures.
• Over-The-Counter (OTC) trading involves private agreements between parties.
• Different exchanges specialize in local products and currencies.

Types of Financial Products

• Equity and Stock: Includes IPOs and secondary trading.
• Debt Products: Loans and bonds, including sovereign and corporate debt.
• Commodities: Traded in futures or physical formats.
• Real Estate: Market intricacies highlighted by the 2008 financial crisis.
• Derivatives: Include swaps, options, and structured products.

Market Participants

• Banks: Commercial and investment banks, post-Glass-Steagall changes.
• Asset Managers, Hedge Funds, Private Equity: Diversified investment and profit strategies.
• Governments: Influence through policies and regulations.
• Corporate Hedgers: Manage market-related risks through hedging.

Trading Types and Strategies

Hedging

• Example of currency and interest rate hedging.
• Risk management extends beyond corporate treasury duties.

Market Making

• Dealers provide liquidity and take principal risks.
• Differentiation between market makers and brokers.

Proprietary Trading

• Includes directional trading, arbitrage, value trading, and systematic trading.
• Use of mathematical models to identify trading opportunities.

Application of Mathematics in Finance

• Pricing Models: Solve differential equations for complex product pricing.
• Risk Management: Quantification of exposure using mathematical tools.
• Trading Strategies: Develop models to predict market movements.

Closing Thoughts and Homework

• Consider how mathematics aids in understanding and managing finance.
• Suggested homework: Review financial glossary and course materials for better understanding.
• Examples of real-world applications and student projects discussed, showcasing the use of mathematics in practical finance.

• Note: These notes summarize key points from the introductory lecture and outline the structure of the course and topics to be covered.