1. Introduction to the Financial Markets

How can the economic environment influence the values of various assets such as stocks and bonds? More specifically, how can we use such influences to get a better view of how some asset values will change? Even more preliminarily, what do these quantities such as “yield curve” and “basis points” mean for investors and those, like ourselves, who are trying to project the values of certain financial assets? If we can get a better view of asset values in the near future then we may sell those we expect to fall in price while holding on to those we expect to increase in value or even increase our holding of them. But how long is “the future”? How long ahead can we expect to get a worthwhile view that can be used in this way to make money? Such a process of buying and selling financial assets is risky. This is particularly so in view of the fall in technology shares during 2001, from when they were heavily overpriced to thepresent,whenanumberofdotcomfirmshavegonebankruptandeven large companiesare infinancialdifficulties,withreducedprofitability.Evenmoreriskhasbeen added to the economic environment with the attack on the World Trade Center in New York on 11 September 2001. The subsequent reduction in air travel caused a fall of up to 50%inthesharevaluesofsomeairlinecompanies.Numerousbailoutsbygovernmentsof their local airlines, such as SwissAir, then occurred. Considerable amounts of personal and corporate investment were wiped out in the process. Clearly, predicting the future is madeverymuchmoredifficult in thepresenceof suchevents,with thepossibilityofmore to come. With increased risk must also come better risk assessment and control as an increasingly important part of financial asset management. But how did we get here from the earlier days? How did the enormous financial services industry, with its decidedly global features straddling international frontiers, develop from the small beginnings of the local financial asset groups of the 18th and 19th centuries?