Financial economics is the branch of economics concerned with “the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment”. It is additionally characterised by its “concentration on monetary activities”, in which “money of one type or another is likely to appear on both sides of a trade”. The questions within financial economics are typically framed in terms of “time, uncertainty, options, and information”.
* Time: money now is traded for money in the future.
* Uncertainty (or risk): The amount of money to be transferred in the future is uncertain.
* Options: one party to the transaction can make a decision at a later time that will affect subsequent transfers of money.
* Information: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future monetary value (FMV).