World Climate Change

Friends, if you watch the television news currently, there are issues that seems so common to hear. Sorry, I am not pointing at the non-stop stupid political quarrels, what I mean is the world unusual natural phenomena, like severe cloudburst and storm all around the world, the melt of arctic pole iceberg and the latest volcano explosion in Filipina, the most astonishing thing is when I saw the picture of a polar bear eating a small bear.

Besides that, the most catching eyes issues, without doubt, sure is the coming Copenhagen meeting. Maybe this seems encouraging for some people, which world climate change get attention from all leaders. However, I am not that optimistic, in my view, I think this meeting is useless.

I believe that, the earth pollution situation is being at the critical point now, and final destruction is unavoidable, human decisions can only determine the sooner or later of the destruction only. If you used to watch the movie “The Day the Earth Stood Still”, there is a scene, which the kid asked the human form alien:” when alien arrive (earth destruction), what should we do? Run or fight?” The alien replied:” neither.” The alien’s answer is what I feel suitable for any coming remediation.

In finance, compounding effect seems common to me. Here, I would like to apply it on world climate change, I believe that the earth and all human being will facing a critical turn point soon, maybe around 50 years, it is logical when you imagine that the pollution and climate change is evolve at a compounding rate.

It is sad that nowadays human still get trapped in and fight blindly for politic power, wealth, stupid stuffs, and did not notice all those things will gone soon. Will human being have the ability to evolve when time come? Like what the scientist argued with the alien in the above stated movie? I hope so even it seems impossible, what your say?

What Should I Do

When people ask me to die, I live; When people ask me to live, I die,

Don't ever ask me why, for I only know little about myself,

Who am I?

Someone always walks a lonely way, I am the someone,

For I am just feel comfort with that,

Am I?

When I am happy, everyday seems a good day;

When I am sad, each day represents a disaster,

Time is a double face,

Possessed both kindly and cruelty traits,

Should I hate it? appreciate it?

Folly guy, poor guy, lonely guy,

You are nothing now,

Step back a while, concentrate and prepare for your time,

Understand?

Finance - Financial Market

Being in finance field, it is necessary for us to know the function, structure and operation of financial market, in this post, I will write on the function of financial market.

Aside from the purpose to accumulate wealth, in broader view, finance world actually is a place where firms or similar entities acquire money for their continuing operation and development. Think about this, A like to start a business, but he need a sum of capital to do that; while B, C and D have lots of money, but they do not know how to use their money to accumulate more wealth as they are not good in business stuff.

In your opinion, is it a better way if B, C, and D money being gathered and used by A to start his/her business and thus add value to the money? I do believe most of us will not deny it. So, financial market existed just to meet both parties: A (borrower) and B, C, and D (lenders), and let the cash can be used efficiently instead of keep it under yours and mine beds ~ :D.

Financial market is something important in an economic to help develop a country, and make the country have better living standard (reduce unemployment rate, increase gross domestic product (GDP), increase government income and else), but everything can be both end sword if think in deep; you may refer to one of my post:

http://yappypath.blogspot.com/2009/11/think-deep-in-finance-part-2-asian-rare.html

http://yappypath.blogspot.com/2009/11/think-deep-in-finance.html 

Next post I will touch on financial market structure, thanks.

Finance - Time Value of Money (TVM)

Continue from last post, this post will be touch on calculations of TVM. To get the future value of present money value in ‘n’ years later (or vice-versa) with fixed interest rate annually, the calculation is shown as below: 

PV to FV: PV x (1 + i)ⁿ = FV

FV to PV: FV / (1 + i)ⁿ = PV

*i = interest/discount rate, n = year

When PV to FV, we call that rate as interest rate; in inverse way, it is called as discount rate. 

Well, we use the above calculation if only certain assumptions met. What if the money being invested/lend/save/borrow in regularly terms like installment? Let’s look at below annually paid installment calculation (also known as annuity): 

FV of annuity: annual payment x 1 / i ( [1 + i]ⁿ – 1 ) 
PV of annuity: annual payment x 1 / i ( 1 – 1 / [1 + i]ⁿ )

*You may wonder that the annuity calculation is so complicated and how people always calculate in this way? Actually finance people have a calculator designed specific for finance usage only, so we need not calculate by using formula anymore ~ :D .

These are only a few basic calculations for TVM, there will be much more to explore in depth, like different cash flow stream, different rates and else. Here is just to let you have a basic understanding in finance. 

So far for the basic quantitative stuffs, in next post, I will touch on structure of financial market, good day~!

Finance - Risk and Return (Rate)

In finance field, it is common for people to hear this phrase: higher risk compensated with higher return (take note; there is not necessary in vice-versa form). Well, what is risk then? Let’s look at an example: If you are going to lend a sum of money to two of your friends, A and B, and you know that A had a stable income, while B still being unemployed, who do you think will have the higher probability of failure in return back your money? In common sense, you should assume that B will more probably to default in his/her payment, hence, the lending to B will be more riskier than A. So, from the above example, we can define that risk is the uncertainty of something, and which out of our control extension.

When we said that proportion of risk have to be compensated by equivalence proportion of return, then how to determine the form of return? In finance, people use different rates to measure different risk. Loan risk compensated by loan rate, deposit has a return based on deposit rate, and so on. Before further the discussion on different types of rates, I would like to show you the impact of rate on value of money first. To understand the effect, there are few terms that you should know: Time Value of Money (TVM), Compounding Effect, Present Value (PV), Future Value (FV) and Discount/Interest Rate (i).

Assume that you are holding RM1 now (PV = 1), with annual interest rate of 5% (i = 0.05), and we make an assumption that the rate will be remain the same in next 10 years. So, what is your RM1 value after 10 years if it is value added by 5% interest rate annually? Now, to calculate the value, we have to consider compounding effect, compounding effect is occur when interest rate is build on principle value + previous accumulated interest. To make it simple, let’s look at below calculation example.

Compounding Effect:

Value of RM1 after 1st year: RM1 + RM1 x 0.05 = RM1.05

Value of RM1 after 2nd year: RM1.05 + RM1.05 x 0.05 = RM1.1025

Without Compounding Effect:

Value of RM1 after 1st year: RM1 + RM1 x 0.05 = RM1.05

Value of RM1 after 2nd year: RM1.05 + RM1 x 0.05 = RM1.1

See the difference? In common, we only multiply directly the interest rate on principle value, but we had ignored the previous accumulated interest on principle.

We discuss this far till here, next post I will continue on the various calculations of Time Value of Money, have a nice day~!