In this work, we develop models designed to enable the Analyst to better counsel an Investor. Before embarking on this task, it is useful to consider the role of theory in practical affairs. This work is concerned with theory . To understand a complex financial economy, one must begin with a simple one.
All economic theory uses abstraction .
Key elements of a process are investigated in the hope that resulting implications will help illuminate the issues being addressed. In effect, the financial economist builds a simplified model to help answer one or more questions. Not surprisingly, different questions may be addressed most effectively with different models. Financial economics is concerned with the terms under which financial trades take place. Determining such terms is often called valuation .