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Financial economics evaluates how economic resources are allocated within a market with uncertain conditions and applies economic methods in assessing the financial topics of time, transaction options, and information. This area of economics focuses on how interest rates, prices, shares, and financial variables interact. It intersects financial variables with economic variables and studies how a value of an asset is determined as well as topics in financial markets.

Financial economics constructs models to locate possible implications from theories and assumptions about the market. An example of an idea in financial economics is the Capital Asset Pricing Model. This model is used to determine the price of assets based on their risk. Time, uncertainty, options, and information are variables that decisions are based off of in financial economics, demonstrated by an asset’s risk being a variable in determining its value.

Financial economics is different from regular economics because it emphasizes the impact individual investments have on financial markets. Financial economists see prices and rates as being the outcomes of the choices to buy or sell that investors make. By using factors that alter investment decisions, financial economists predict the behaviour of financial markets. Market conditions can be predicted using financial economic theories and equations.

Arbitrage, the process of making money through trade without the risk of losing money, is an important concept in financial economics. It relates to profit maximization and is used in parts of financial theory.

As a quantitative discipline, financial economics uses econometrics and other mathematical processes in its theory development and practices.

Categories within Finance


Postings: 350

A bond is a tool used in financial economics to ensure debt security and function as fixed-income financial assets.


Postings: 220

In economics, an investment refers to saving a sum such as income or postponing consumption.

The Time Value of Money

Postings: 102

The time value of money follows the idea that the value of money at the present time has a greater amount of value than the same amount it would have in the future because of potential earning capacity.

Personal Finance & Savings

Postings: 620

Personal finance refers to the financial management of which an individual or a family is required to make to obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events.

Risk Management

Postings: 25

Risk management is the process of identifying and analyzing the possibilities of financial risk and how to monitor and control the possibility of these risks occurring.

Brexit referendum in the EU

Please assist me by providing a detail background about the UK referendum to stay in EU? Please assist me to understand why there is such issue at the first place? How did it all became a referendum for public to decide whether Britain should exit EU? What are the political/financial reason behind such referendum? Are there

Continuous Income Stream

Starting at age 25, you deposit $2000 a year into an IRA account for retirement. Treat the yearly deposits into the account as a continuous income stream. If money in the account earns 6%, compounded continuously, how much will be in the account 40 years later, when you retire at age 65? How much of the final amount is interest?

New Economics & Option Strategy

1. Use a diagram to explain the "new economics" proposition of monetary policy effectiveness. Describe the underlying assumptions of the new economics model. What is the policy ineffectiveness proposition? 2. Use the figure attached... a. to demonstrate the gains and losses to a short put and a long put on dollars with

Balance Sheets, Double-Entry Bookkeeping and Currency Arbitrage Questions

1. Describe, and illustrate with balance sheets of both the Bank of Canada and the direct clearers with the Canadian Payments Association, the change in the monetary base in response to the following transactions: a. A Bank of Canada open market sale to the public of $100 million of Government of Canada securities. b. A

James Tobin Model for Money Demand

Formulate James Tobin's model of risk and portfolio choice, and with the use of a diagram, show how his model explains the inverse relationship between the demand for money and the rate of interest.

Virtual Banking, Interest Rate, Risk and Return for Portfolio

-) What is the price of a 91-day treasury bill when market yields are eight percent? -) Explain how caps, floors, and collars are used to control interest-rate risk. -) What is meant by the term virtual banking? Outline the advantages and disadvantages of virtual banking to the public. -) Please see attached page for q

Uses of Maturity Gap and Duration Gap

a. Explain how portfolio managers can use maturity gap and duration gap to measure their exposure to interest-rate risk. b. Explain how portfolio managers can use financial options and futures to hedge interest-rate risk. c. Describe how portfolio managers use financial swaps to control their risk exposure. Explain how bot

Randy's Tireland - Contribution Margin and Net Loss

Randy's tireland makes a product that sells for $61 per unit and has $54 per unit in variable costs. Annual fixed costs are $24,000. If Rambles sells 10 units less than breakeven, how much loss would the company recognize on its income statement?

weighted average contribution margin

Lambardi Company sells 3 types of bags. Bag A sells for $20 and has variable cost of $9.00 per unit. Bag B sells for $13 and has variable cost of $12.00 per unit. Bag C sells for $4 and has variable costs of $6.00 per unit. Lambardi sells in a mix of 2 units of A, 3 units of B and 5 units of C. What is the weighted average

target cost

A new product is being designed by an engineering team at Golem Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a target costing methodology. An analysis of similar products on the market suggests a

Completing a Break Even Analysis

A company has $50 per unit in variable costs and $1,200,000 per year in fixed costs. Demand is estimated to be 110,000 units annually. What is the price if a markup of 40% on total cost is used to determine the price?

effect on profit

PowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was: Direct material $625,000 Direct labor 375,000 Variable overhead 125,000 Fixed overhead 1,500,000 Total cost $2,625,000 At the start of the current year, the company received an order f

full cost

The Falling Snow Company is considering production of a lighted world globe that the company would price at a markup of 0.30 percent above full cost. Management estimates that the variable cost of the globe will be $68 per unit and fixed costs per year will be $240,000. Assuming sales of 1,200 units, what is the full cost of a

Profit of Tory Company

Tory Company sells a single product. Troy estimates demand and costs at various activity levels as follows: Units Sold Price Total Variable Costs Fixed Costs 120,000 $48 $3,000,000 $1,000,000 159,000 $45 $3,550,000 $1,000,000 160,000 $40 $4,000,000 $1,000

incremental savings

Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below: Cost per Unit Variable costs Direct material $920 Direct labor

Joint Cost

Landmark Coal operates a mine. During July, the company obtained 500 tons of ore, which yielded 250 pounds of gold and 63,400 pounds of copper. The joint cost related to the operation was $500,000. Gold sells for $325 per ounce and copper sells for $0.85 per pound. Allocate the joint costs using relative weight. With these cost

Margin of safety

Assume Sparkle Co. expects to sell 150 units next month. The unit sales price is $90, unit variable cost is $30, and the fixed costs per month are $5,000. The margin of safety is:

break even

Winny's Office Furniture has a contribution margin ratio of 16%. If fixed costs are $187,800, how many dollars of revenue must the company generate in order to reach the break-even point?

Variable cost using the High- Low Method

Rooter's Cleaning Services provided data concerning the costs incurred to clean hotel rooms for which hotel customers pay $150 per night. Data for the past 7 months are as follows: January February March April May June July Number of rooms cleaned 250 160


Mama Italiano Sauce is in the process of preparing a production cost budget for May. The actual costs in April were: Mama Italian Sauce Production Cost Budget April 2008 Production - Jars of sauce 20,000 Ingredient cost (variable) $16,000 Labor cost (variable) 9,000 Rent (fixed) 4

Incremental Costs

Consider the production cost information for Mama Italiano Sauce given below: Mama Italian Sauce Production Cost Budget April 2008 Production - Jars of sauce 20,000 Ingredient cost (variable) $16,000 Labor cost (variable) 9,000 Rent (fixed) 4,000 Depreciation (fixed) 6,000 Other (fix

Incremental Profit or Loss

Elroy Rocket is entering his senior year as an accounting major and has a number of options for his summer break. His options for the 3 month break follow: (1) Work full time at a local accounting firm making $2,900 per month. (2) Take a summer class which will cost $800 and work half time making $1,100 per month. (3) Take

Capital Gain/Loss of Brighton Corp.

Brighton Corp. bought an oil rig exactly 6 years ago for $113,000,000. Brighton depreciates oil rigs straight line over 10 years assuming no salvage value. The rig was just sold to British Petroleum for $34,000,000. What Capital Gain/Loss will Brighton report on this transaction?

Stock Value Using CAPM and DDM

Frazier Manufacturing paid a dividend last year of $2, which is expected to grow at a constant rate of 5%. Frazier has a beta of 1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the value of Frazier's stock.

Weighted Average Cost of Capital (WACC) of Firm's Financing

Assume the following facts about a firm's financing in the next year. Calculate the weighted cost of the capital of this project: Proportion of Capital Projected funded by debt = 45% Proportion of Capital Projects Funded by equity = 55% Return Received by Bondholders = 0.08 Return Received by Stockholders = 0.14.

NPV for an Art Gallery Expansion

An Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project?

Internal Rate of Return for a Company's New Development Project

A Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project?

The Economics of your Starting Salary

Scenario: You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted into medical school is about 10 percent. If you are accepted into medical school, then your starting salary when you graduate will be $300,000 per year. However, if you a

Calculating the Dividend Gain

Lee purchased a stock one year ago for $25. The stock is now worth $30, and the total return to Lee for owning the stock was 0.37. What is the dollar amount of dividends that he received for owning the stock during the year?