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BU4010 – Quantitative Methods in Finance

BU4010 – Quantitative Methods in Finance. LECTURE ONE Fundamentals of Business Mathematics 1 Pippa Edmonds pippaedmonds@online.sch.im. 1. INTRODUCTION. Aim of the module Leaning outcomes of the module Lecture/Seminar attendance Plan for the year Some rules to follow Key reading list

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BU4010 – Quantitative Methods in Finance

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  1. BU4010 – Quantitative Methods in Finance LECTURE ONE Fundamentals of Business Mathematics 1 Pippa Edmonds pippaedmonds@online.sch.im 1

  2. INTRODUCTION Aim of the module Leaning outcomes of the module Lecture/Seminar attendance Plan for the year Some rules to follow Key reading list Learning outcome for today

  3. AIM OF THE MODULE To introduce students to the basic theoretical underpinning of quantitative techniques in finance. To examine and demonstrate the application of quantitative techniques including the use of spread sheets to solve simple accounting and finance based problems. To provide the basic framework for applying quantitative techniques to decision making in organisations.

  4. MODULE LEARNING OUTCOMES Identify and understand the quantitative techniques necessary for modern business decision making. Perform calculations using quantitative techniques. Present and interpret calculations in relation to the application of quantitative techniques for decision making.

  5. ATTENDANCE In order to be deemed to have fully participated in the modules learning outcomes, students are expected to attended at least a minimum number of 80% of lectures and seminars during the course of the module. Attendance: Total staff/student contact: 1 hour lecture /1 hour seminar each week . It is expected that students will attend timetabled activities and arrive punctually as well as be fully prepared for the activity.

  6. PLAN FOR YEAR

  7. PLAN FOR YEAR CONTINUED

  8. SOME RULES TO FOLLOW The use of mobile phones in the classroom is strictly prohibited. Please switch them off or keep them in silent mode during classes. Personal conversations are not allowed while lectures and seminars are in progress. They can lead to distractions both for the lecturer and other students. You may excuse yourself quietly from the class if you have need to do so. Late coming is strongly discouraged and latecomers are advised to come in a manner that ensures the lecture/seminar is not disturbed. There is an overall expectation that members of the class organisethemselves in such a manner that helps maintain respect for the diverse needs of other members of the class.

  9. KEY READING LIST CIMA Official Study Text (2013-2014) Paper CO3 Fundamentals of Business Mathematics by Kaplan Publishing. CIMA Exam Practice Kit (2013-2014) Paper CO3 Fundamentals of Business Mathematics by Kaplan Publishing See module handbook for additional reading list.

  10. KEY READING LIST

  11. QUANTITATIVE RESEARCH TECHNIQUES AND SOCIAL RESEARCH Social research is the detective work of big questions providing answers to a wide range of social issues. A conventional detective is concerned with detecting criminals who commit crime. As social scientists, our primary concern is to detect and analyse why ‘crime’ occurs! We are therefore concerned with issues such as: The behavioural trends of individuals, organisations and the society. The behaviour of investments, the financial markets (debt and equity markets), the housing market and why prices change… How can we make organisations function more efficiently?

  12. TODAY’S LEARNING OUTCOMES Review of basic mathematical relationships such as: • Brackets • Number signage • Reciprocals • Proportions (percentages and ratios)

  13. OVERCOMING OUR INHIBITIONS

  14. BRACKETS Brackets provide us the flexibility of analysing mathematical functions in an orderly manner 2+3 x 4 = ? (2+3) x 4 = TWENTY 2 + (3 x 4) = FOURTEEN

  15. Brackets Brackets first Work out functions Division Multiplication Addition Subtraction To memorize the order of operations, simply memorise the word ‘BEDMAS’ or ‘BODMAS’.

  16. Some Examples on Brackets (3 +1) x 2 = ? = brackets first, 3+1=4 so 4 x2 =8 9-7 ÷ 2 = ? = 7 ÷ 2 first, so 9-3.5 = 5.5 5 + 7 x 8 –2 = = 7x8 first, so 5+56-2=59

  17. NUMBERS Whole Number – e.g. 5 – Integer Part of a number – e.g. ¾ - Fraction Part of a number – e.g. 0.75 – Decimal Top half of fraction – Numerator Bottom half of a fraction - Denominator Positive numbers – such as +5 Negative numbers – such as -3

  18. Negative Numbers Adding a negative number is same as subtracting A + (-B) = A-B Subtracting a negative is the same as adding A – (-B) = A +B Multiplying or dividing a positive number by a negative number gives a negative number. Multiplying or dividing a negative number by a negative number gives a positive number.

  19. Example of Negative Number Operations (5 – 8) x (-6) = = -3 x (-6) = 18 12 – 8 ÷ (-4) = = 12 –(-2) = 12+2 = 14

  20. RECIPROCALS The reciprocal of a fraction is the fraction upside down Reciprocal of ¼ is 4/1=4 The reciprocal of a whole number is 1 divided by the number. Multiplying by the reciprocal of a number is the same as dividing by the same number – ½ x 2/1= 1. We also have that multiplying by ¼ is the same as dividing by 4 or multiplying by 0.25

  21. Reciprocals A common reciprocal relationship in finance is 1/(x+y) or 1/ (x-y). This relationship is very common in financial mathematics where we deal predominantly with interest rates. For example, If you deposit £10 in a deposit account for one year at 5%. 5% = 5/100 = 0.05 Principal + interest= £10 + (£10 x 0.05) = £10 (1 + 0.05) = £10.50

  22. Reciprocals If you had received £10.50 after one year at 5% Use reciprocal 1/(1+x) to calculate the principal sum from the payment received after year one. Principal = £10.50 * [1/ (1+ 0.05)] = ? NB Remember the BODMAS rule !

  23. ROUNDING UP OR DOWN RULES Discard digits from right to left. Reading from left to right, if the first digit to be discarded is 0-4, the previous digit is retained. If the first digit to be discarded is 5-9, the previous digit goes up one. Round 78.187 to nearest whole number 78.19 78.2 78

  24. Summary Rounding Rules • Rounding to a specificplace: • Identify the place. • “nearest hundred”, for example. • Look at the digit immediately to the right. • Is it 5 or higher? If so round up. • Is it 4 or lower? If so, the specified digit stays the same. • All digits to the right of the specified placebecome zeros.

  25. Further Example on Rounding Let us consider rounding the number 5737.876 to a whole number, to tens, hundreds and thousands: To a whole number : 5738 Tens : 5740 Hundreds: 5700 Thousands : 6000

  26. Example on Rounding Write 86,531 to 3 significant figures: gives 86,500 to 3 significant figures Write 25.7842 to 2 decimal places: gives 25.78 to 2 decimal places Remember that rounding can be Up or Down. NB: Errors can be introduced when rounding numbers up or down.

  27. Further Examples Round to the nearest hundred: 4,856 4900 10,527 10,500 234,567 234,600 8,648,078 8,648,100

  28. PROPORTIONS A percentage (%) is a fraction of 100. Percentages are essential to analysing the value of assets due to the fact that the interest rate is identified as the cost of capital. A ratio is one number divided by another. We adopt ratio analysis as a tool for analysing corporate financial reports such as the statement of financial position (balance sheet), the income statement (profit and loss account) and the statement of cash flows (cash flow statement).

  29. Example on Proportions Express 4.6 as a ratio of 23.0 We have 4.6 ÷ 23.0 = 0.2 And the answer as a percentage 0.2 x 100 = 20%

  30. LECTURE SUMMARY We reviewed some basic mathematical relationships such as brackets, number signage, reciprocals and proportions. We have also identified a simple order of mathematical operations ‘BEDMAS’ or ‘BODMAS’.

  31. END OF LECTURE ANY QUESTIONS?

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