Finance is the study of how various financial markets, financial institutions and the financial systems work within the economic system. It is also concerned with the allocation and generation of capital and funds that can make profits or interest payments when put to good use. The study and analysis of the effects of monetary policy have a significant bearing on the long-term viability of a country’s economy and also the risks associated with it.
Finance has several theoretical foundations and many concepts that are developed over time. Principles, theories and concepts that have had the greatest effect on Finance are behavioural economics, asset theory, banking theory, capital budgeting, monetary theory, central bank theory and asset pricing. All these theories have helped finance to shed light on the factors that govern the supply and demand of money in the market and have provided valuable tools for the managers to undertake an economic analysis. These concepts have helped to explain why some fiscal policies have been effective and have helped the economy to achieve certain objectives.
The theories that govern modern financial policy are asset theory, behavioral finance and banking theory. Asset theory suggests that the prices of particular assets are determined by their usefulness in producing and guaranteeing income and output. Asset prices are also affected by the existing supply and demand in the market. By following this theory, the present day manager can decide the allocation of resources according to the expected future returns on investment. This is the basic assumption underlying most of the modern financial policies and measures.
Behavioral finance is a branch of modern financial theories that are concerned with predicting the behavior of investment decisions. This is an attempt to explain why some fiscal policies have led to success and others have failed. The chief factor influencing investment decisions is called the theory of demand. This suggests that investors make investments in order to obtain income and this implies that when supply is high, investors will not only abstain from non-investment, they will also invest to obtain income. Behavioral finance is one of the major influences upon the design of financial instruments like derivatives, mutual funds, credit default swaps, option pricing and mortgage rates.
Another branch of modern economics that influences financing instruments is microeconomics or the economic scope of finance. Microeconomics studies the interactions of economic agents with decision-making mechanisms. There are three broad approaches to accounting which are managerial, economic and the financial accounting systems. All the three have their own contribution to make to the study of finance.
Modern financial markets are highly dependent upon information. Finance therefore requires analysts who possess a wide range of subject knowledge and domain expertise in order to forecast the movement of markets. In order to become a successful professional in the field of financial mathematics, an individual needs to attain a four-year undergraduate degree in a finance related field and a four year graduate degree in an advanced graduate program in finance or economics.