READING EXERCISES

 TEXT 1 

Analysis of Financial Statements

Analysis of financial statements involves evaluating a company’s financial health, performance, and trends using data from the balance sheet, income statement, and cash flow statement. Key techniques include horizontal analysis (trends over time), vertical analysis (percentage of base figures), and ratio analysis to assess profitability, liquidity, solvency, and efficiency. 

Key Components of Financial Statement Analysis

• Income Statement Analysis: Evaluates revenue, expenses, and net income to determine profitability and operating performance over a period.
• Balance Sheet Analysis: Assesses a company's financial position at a specific point in time, focusing on assets (what it owns), liabilities (what it owes), and equity.
• Cash Flow Statement Analysis: Tracks cash generated and used in operating, investing, and financing activities. 

Core Techniques and Tools

• Ratio Analysis:
• Liquidity: Measures short-term obligations, such as the current ratio (
• Profitability: Evaluates earnings generated relative to sales or assets, such as gross profit margin and net profit margin.
• Leverage/Solvency: Measures reliance on debt and long-term sustainability, such as the debt-to-equity ratio.
• Efficiency: Shows how well a company uses its assets, such as inventory turnover or asset turnover ratios.
• Horizontal (Trend) Analysis: Compares financial data across multiple periods to identify trends and growth trajectories.
• Vertical (Common Size) Analysis: Expresses each item as a percentage of a base amount (e.g., total revenue for the income statement) to understand cost structures.
• DuPont Analysis: Deconstructs return on equity (ROE) into profitability, asset efficiency, and financial leverage to analyze what drives company performance. 

Purpose and Benefits
Financial analysis helps stakeholders like investors and creditors make informed decisions regarding investments, creditworthiness, and identifying potential risks. It allows for benchmarking against industry peers to assess competitiveness.

TEXT 2

What is Mathematical Modeling?

Mathematical modeling in quantitative finance refers to the use of mathematical techniques and models to describe, analyze, and predict financial markets, instruments, and phenomena. It involves constructing mathematical representations of financial variables, relationships, and processes to gain insights, make predictions, and facilitate decision-making in the field of finance. It helps in pricing derivatives, developing trading strategies, risk management, and asset allocation. However, it's important to acknowledge that models are simplifications of complex reality and rely on assumptions, data quality, and ongoing validation and refinement to maintain their usefulness.

Here are the key aspects of mathematical modeling in quantitative finance:

Representation of Financial Variables: Mathematical modeling involves representing financial variables, such as asset prices, interest rates, volatility, and other market factors, using mathematical symbols and equations. These variables are often modeled as random processes or stochastic differential equations to capture their inherent uncertainty and randomness.

Building Models: Mathematical models in quantitative finance can take various forms, including stochastic models, time series models, optimization models, and simulation models. These models are constructed based on the underlying assumptions and characteristics of the financial phenomena being studied. They may incorporate statistical techniques, differential equations, probability theory, optimization methods, and other mathematical tools.

Understanding Relationships: Mathematical models enable the exploration and understanding of relationships between financial variables. They help identify dependencies, correlations, and causal relationships between market factors, asset prices, and other relevant financial quantities. Models provide a structured framework to analyze the impact of different factors on financial outcomes.

Prediction and Forecasting: Mathematical models are utilized for prediction and forecasting in quantitative finance. By incorporating historical data, statistical techniques, and underlying market dynamics, models can generate forecasts of future market behavior, asset prices, or other financial quantities. These predictions help inform investment decisions, risk management strategies, and trading strategies.

Risk Analysis and Management: Mathematical models are instrumental in assessing and managing financial risk. Models, such as value-at-risk (VaR) models, stress testing models, or credit risk models, quantify the potential losses and risks associated with various financial positions or portfolios. These models aid in the measurement, analysis, and mitigation of risk exposures.

Model Calibration and Validation: Mathematical models require calibration to real-world data to ensure accuracy and relevance. Calibration involves estimating model parameters based on historical market data or observed market prices. Models are also subject to validation to assess their performance and evaluate their ability to capture the behavior of financial markets and instruments.

TEXT 3

What is Mathematical Modeling?

Mathematical modeling in quantitative finance refers to the use of mathematical techniques and models to describe, analyze, and predict financial markets, instruments, and phenomena. It involves constructing mathematical representations of financial variables, relationships, and processes to gain insights, make predictions, and facilitate decision-making in the field of finance. It helps in pricing derivatives, developing trading strategies, risk management, and asset allocation. However, it's important to acknowledge that models are simplifications of complex reality and rely on assumptions, data quality, and ongoing validation and refinement to maintain their usefulness.

Here are the key aspects of mathematical modeling in quantitative finance:

Representation of Financial Variables: Mathematical modeling involves representing financial variables, such as asset prices, interest rates, volatility, and other market factors, using mathematical symbols and equations. These variables are often modeled as random processes or stochastic differential equations to capture their inherent uncertainty and randomness.

Building Models: Mathematical models in quantitative finance can take various forms, including stochastic models, time series models, optimization models, and simulation models. These models are constructed based on the underlying assumptions and characteristics of the financial phenomena being studied. They may incorporate statistical techniques, differential equations, probability theory, optimization methods, and other mathematical tools.

Understanding Relationships: Mathematical models enable the exploration and understanding of relationships between financial variables. They help identify dependencies, correlations, and causal relationships between market factors, asset prices, and other relevant financial quantities. Models provide a structured framework to analyze the impact of different factors on financial outcomes.

Prediction and Forecasting: Mathematical models are utilized for prediction and forecasting in quantitative finance. By incorporating historical data, statistical techniques, and underlying market dynamics, models can generate forecasts of future market behavior, asset prices, or other financial quantities. These predictions help inform investment decisions, risk management strategies, and trading strategies.

Risk Analysis and Management: Mathematical models are instrumental in assessing and managing financial risk. Models, such as value-at-risk (VaR) models, stress testing models, or credit risk models, quantify the potential losses and risks associated with various financial positions or portfolios. These models aid in the measurement, analysis, and mitigation of risk exposures.

Model Calibration and Validation: Mathematical models require calibration to real-world data to ensure accuracy and relevance. Calibration involves estimating model parameters based on historical market data or observed market prices. Models are also subject to validation to assess their performance and evaluate their ability to capture the behavior of financial markets and instruments.

TEXT 4

What is Cost Behavior?

Understanding cost behavior is essential in the financial management of a business. As a matter of fact, it has an immense influence on the strategic decisions made by organisations. We can help businesses make informed choices about pricing, production, and resource allocation by recognising how costs change in response to changes in activity levels.

The 5 Main Types of Costs

Fixed Costs

Fixed costs remain constant within a relevant range of activity. They are not directly influenced by changes in production or sales volume. Examples of fixed costs include rent, salaries of top management, and property taxes.

Variable Costs

Variable costs fluctuate directly with changes in activity levels. As production or sales volume increases, so do variable costs. Examples of variable costs include direct materials, direct labour, and sales commissions.

Mixed Costs

Mixed costs, also known as semivariable costs, have both fixed and variable components. A portion of the cost remains constant, while another portion varies with activity. Examples of mixed costs include utilities, telephone expenses, and maintenance costs.

Step Costs

Step costs remain constant within a specific range of activity but change abruptly at certain points. They are similar to fixed costs within a range but may increase or decrease in steps as activity levels change. An example of a step cost is the salary of a supervisor who is hired to oversee a certain number of employees.

Mixed costs

Mixed costs, also known as semivariable costs, have both fixed and variable components. A portion of the cost remains constant, while another portion varies with activity. Examples of mixed costs include utilities, telephone expenses, and maintenance costs.

The Impact of Cost Behavior on Business Strategy

Understanding cost behavior is crucial for developing effective business strategies. By analysing cost structures, businesses can identify areas for cost reduction, improve profitability, and make informed decisions about product pricing, production levels, and resource allocation.

For example, businesses with a high proportion of fixed costs may need to maintain a high level of activity to achieve economies of scale and reduce average costs. On the other hand, businesses with high variable costs may need to focus on pricing strategies that allow them to absorb fluctuations in costs and maintain profitability.

Cost behavior can also influence a company’s competitive strategy. Businesses with a cost advantage, often achieved through efficient operations and lower costs, can compete on price and attract customers seeking value. Conversely, businesses with a differentiation strategy may focus on offering unique products or services that justify higher prices.

The impact of costs on decision making of a business is enormous in these areas of a business:

Pricing: Knowing the variable cost per unit helps determine the minimum selling price to cover costs and contribute to profit.

Production Planning: By understanding fixed and variable costs, businesses can make informed decisions about production levels and capacity utilisation.

Cost-Volume-Profit (CVP) Analysis: CVP analysis uses cost behavior information to determine the break-even point, margin of safety, and target profit levels.

Budgeting: Accurate cost behavior information is essential for developing realistic budgets and forecasting future costs.

EXERCISES "TO BE" AND "TO HAVE"

EXERCISE  Write the following sentences in Spanish.

(Lo subrayado son verbos y lo subrayado y resaltado en amarillo son preposiciones.)

1. The DSO metric is a critical indicator of cash flow health and operational efficiency.

2. Net worth is the total value of an individual's or company’s assets minus their total liabilities. 

3. The International Monetary Fund is a monetary institution charged with the responsabity of promounting international financial and exchange stability through the adoption of solid macroeconomic policies in its member countries. 

4. Macroeconomic instability is often characterized by high and variable inflation, serious balance of payments problems, large fiscal deficits, low or negative output growth, and high and growing unemployment.

5. During the 18th century, Wall Street was a slave market and securities trading site.

6. Many energy bills have a fixed monthly fee included in the total.

7. The New Public Management (NPM) was created in the 1990’s at a time whenthe public had little faith in public institutions.

The NPM emerged in the 1990s at a time when the public had little faith in public

institutions

FOREIGN TRADE (NFs exercise)

Foreign Trade vs International Trade

Discover How Foreign Trade Powers Chile’s Global Economy — What You Need to Know

Foreign trade vs international trade are often used interchangeably, but understanding their differences is essential—especially if you’re involved in global logistics, international business, or foreign trade operations. Whether you’re an importer, exporter, or trade assistant, this guide will help you navigate how foreign trade works in Chile and why it’s a key player on the global stage.

What Is Foreign Trade?

Foreign trade refers to the import and export of goods and services between countries. It enables nations to access products they don’t produce domestically while selling what they have in surplus. International trade, in a broader sense, includes not only the exchange of goods and services but also the policies, regulations, and global partnerships that facilitate this exchange.

EJERCITACIÓN

Traducir al español el cuadro.

The Twentieth Century Economic Paradigms (CUESTIONARIO)

Conteste el cuestionario con información del texto

The Twentieth Century Paradigms

We can demarcate three epochs of economic thinking over the past century. Each began with new economic analysis and data that undermined the prevailing view, and each altered the way the profession examined the intersection between how the economy works and the role of society and policymakers in shaping economic outcomes. In each of these time periods, economists made an argument to policymakers about what actions would deliver what the profession considered the optimal outcomes for society. Thanks in no small part to the real-world successes of the first epoch, policymakers today tend to listen to economists’ advice.

The first epoch began in the early twentieth century, when Cambridge University economist John Maynard Keynes altered the course of economic thinking. He started from the assumption that markets do not always self-correct, which means that the economy can be trapped in a situation where people and capital are not being fully utilized. Unemployment—people who want to work but are unable to find a job—is due to firms not deploying sufficient investment because they do not see enough customers to eventually buy the goods and services they would produce. From this insight flowed a series of policy prescriptions, key among them the idea that when the economy is operating at less than full employment, only government has the power to get back to full employment, by filling in the gap and providing sufficient demand. Keynes’s contribution is often summarized to be that demand—people with money in their pockets ready to buy—keeps the economy moving. For economists, the methodological contribution was that policymakers could push on aggregate indicators, such as by boosting overall consumption, to change economic outcomes.

Available at https://democracyjournal.org/magazine/53/a-new-economic-paradigm/ (Acceso 17 de junio de 2024)

Cuestionario

1.¿Cuántas épocas del pensamiento económico se pueden demarcar en el último siglo según el texto?

2.¿Qué evento marcó el inicio de la primera época del pensamiento económico en el siglo XX?

3.¿Cuál fue la suposición inicial de John Maynard Keynes sobre los mercados?

4¿.Cómo define Keynes el desempleo en su análisis económico?

5.¿Qué papel asigna Keynes al gobierno cuando la economía opera a menos del pleno empleo?

6.¿Cómo se resume a menudo la contribución de Keynes a la economía?

7.¿Qué tipo de indicadores sugirió Keynes que los responsables de las políticas deberían impulsar para cambiar los resultados económicos?

8.¿Por qué los responsables de las políticas tienden a escuchar los consejos de los economistas hoy en día?

9.¿Qué alteró cada época del pensamiento económico en la profesión?

10.¿Qué argumentaron los economistas ante los responsables de las políticas en cada una de estas épocas?

Walras's Law (CUESTIONARIO)

 Answer the questions about the text

Understanding Walras's Law

Walras's law is named after French economist Léon Walras (1834 - 1910), who created general equilibrium theory and founded the Lausanne School of economics. Walras's famous insights can be found in the book Elements of Pure Economics, published in 1874. Walras, along with William Jevons and Carl Menger, were considered founding fathers of neoclassical economics.

Walras's law assumes that the invisible hand is at work to settle markets into equilibrium. Where there is excess demand, the invisible hand will raise prices; where there is excess supply, the hand will lower prices for consumers to drive markets into a state of balance.

Producers, for their part, will respond rationally to changes in interest rates. If rates rise they will reduce production and if they fall they will invest more in manufacturing facilities. Walras predicated all of these theoretical dynamics upon the assumptions that consumers pursue self-interests and that firms try to maximize profits.

Limitations of Walras's Law

In practice, observations have not matched Walras's theory in many cases. Even if "all other markets" were in equilibrium, an excess of supply or demand in an observed market meant that it was not in equilibrium. Walras's law looks at markets as a whole rather than individually.

Economists who studied and built on Walras's law hypothesized that the challenge of quantifying units of so-called "utility," a subjective concept, made it difficult to formulate the law in mathematical equations, which Walras wanted to do. Measuring utility for each individual, not to mention aggregating across a population to form a utility function, was not a practical exercise, critics of Walras's law argued. According to them, if this could not be done, the law would not hold, because utility influences demand.

Available at https://www.investopedia.com/terms/w/walras-law.asp (Acceso 16 de julio, 2024)

 1.   1. ¿Quién es el economista francés al que se le atribuye la creación de la teoría del equilibrio general?

2.  2. ¿Cuál es el título del libro en el que se encuentran los conocimientos más importantes de Walras?

3.     3. ¿En qué año se publicó el libro "Elements of Pure Economics"?

4.    4. ¿Qué economistas, además de Léon Walras, son considerados padres fundadores de la economía neoclásica?

5.    5. ¿Qué asume la ley de Walras sobre el papel de la "mano invisible" en los mercados?

6.   6. ¿Cómo se espera que los productores respondan a los cambios en las tasas de interés según la ley de Walras?

7.  7. ¿Cuáles son las dos suposiciones fundamentales que Walras hace sobre el comportamiento de los consumidores y las empresas?

8.    8. ¿Cuál es una de las limitaciones prácticas de la ley de Walras mencionada en el texto?

9.     9. ¿Cómo se comportan los mercados en la teoría de Walras cuando hay exceso de demanda?

10. 10. ¿Qué dificultad mencionan los críticos de la ley de Walras en relación con la medición de la "utilidad"?

 

 

Definition and Example of a Net Worth Statement (CUESTIONARIO)

Answer the questions about the text

Definition and Example of a Net Worth Statement

A net worth statement is a visual record of the financial wealth of an individual or a business at a specific point in time. It acts like a financial snapshot that allows you to assess your financial status at any given stage of your financial journey.

Knowing the basics of what a net worth statement means and how it works can help you have a clearer picture of where your finances stand. Also, discover how it can serve as a reference point to help you measure the progress of money goals.

Definition and Example of a Net Worth Statement

A net worth statement is a financial tool that shows the financial health and wealth of a company or individual at any given time. Your personal net worth is determined by calculating what you own (assets) minus what you owe (liabilities). A net worth statement provides a summary of your financial status. It gives you a clearer picture of the dollar value of what you own, which can help you measure your overall financial well-being.

If you want to prepare a net worth statement, you would need to list the total value of all your assets and subtract the value of your liabilities. For example, if the list of everything you own has a total value of $100,000 and the list of everything you owe has a value of $60,000, your net worth statement would show that you have a current net worth of $40,000.

            Available at https://www.thebalancemoney.com/what-is-a-net-worth-statement-5225879 (Acceso 17 de julio, 2024)

 ¿Qué es un estado de patrimonio neto?

¿Cómo se describe un estado de patrimonio neto en el texto?

¿Qué utilidad tiene conocer los conceptos básicos de un estado de patrimonio neto?

¿Cómo se determina el patrimonio neto personal?

¿Qué información proporciona un estado de patrimonio neto?

¿Qué pasos se deben seguir para preparar un estado de patrimonio neto?

¿Qué representa la diferencia entre los activos y los pasivos en un estado de patrimonio neto?

En el ejemplo proporcionado, ¿cuál es el valor total de los activos?

En el mismo ejemplo, ¿cuál es el valor total de los pasivos?

¿Cuál es el patrimonio neto en el ejemplo dado en el texto?

WHAT IS READING COMPREHENSION?

What is reading Comprehension?

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