Financial Economics

COMPETENCES AND SKILLS THAT WILL BE ACQUIRED AND LEARNING RESULTS.
At the end of the course students should be able to:
- Compute present and future values of cash-flow streams to compute the net present values of different real and financial investments.
- Have a basic knowledge of the functioning of financial markets and of the way in which investment decisions are made.
- Understand the risk-return tradeoff. Understand how diversification affects risk.
- Have a clear understanding of the difference between systematic and diversifiable risk and know how to measure each.
- Understand how interest rates are set and the principles of valuation of fixed income securities.
- Know the basic types of derivatives and understand why and how they are used in risk management.

DESCRIPTION OF CONTENTS: PROGRAMME

Financial Economics
-1. Introduction to Financial Markets
a.Financing investment in the economy
b.Financial markets and trading financial assets

-2. Financial Mathematics
a.Introduction: The time value of money
b.Simple and compound interest. Equivalent interest rates.
c.Present and Future Values.
d.Annuities

-3. Investment Appraisal
a.Cash flows
b.Determining current and future values
c.Net present value of an investment project
d.Internal rate of return
e.Other valuation techniques

-4. Risk and Return
a.Mathematical representation of a portfolio
b.Expected portfolio returns
c.Variance and standard deviation
d.Finding the minimum variance portfolio
e.Graphical representation of expected return and standard deviation of a portfolio

-5. Portfolio Theory
a.Diversification Effect
b.Assumptions of the Mean-Variance Analysis
c.The Efficient Frontier
d.The tangency portfolio

-6. The Capital Asset Pricing Model (CAPM)
a.Relationship between risk and expected return
b.The CAPM model
c.The CML and The SML
d.Portfolio Beta

-7. Fixed Income Securities
a.Valuation of fixed income
b.The term structure of Interest Rates
c.Forward interest rates
d.Default risk

-8. Derivatives Products
a.Types of derivatives
b.Pricing Principles

Reference text books:
- Bodie Zvi, Kane Alex, Marcus Alan (2005), Essentials of Investments, McGraw Hill (Sixth Edition).
- Brealey R., S. C. Myers and F. Allen (2006), Principles of Corporate Finance, 8th edition, McGraw Hill.

Other useful books:
- Bodie, Z., Kane, A. and Marcus, A. J. (1999), Investments, McGraw Hill (Fouth Edition).
- Grinblatt, M. and S. Titman (2003), Financial Markets and Corporate Strategy, McGraw Hill.

LEARNING ACTIVITIES AND METHODOLOGY
Teaching methodology will be as follows:

-Each topic or sub topic is presented by the professor in a theory session. After the theory session the students have to study the materials, do complementary readings and work on the relevant problem sets. These problem sets and questions from the students are solved in the next practice session. The problem sets have to be solved at home prior to the practice session.

-The course material for each topic (slides that will be used in theory sessions and problem sets to be solved in practice sessions) is provided in advance through the intranet in Aula Global 2.

ASSESSMENT SYSTEM
Grades will be awarded according to the follwing criteria
-Three exams (two exercise based and one mid term). Only the best two marks will be taken into account. This counts as 40% of the total mark.

% end-of-term-examination: 60
% of continuous assessment (assigments, laboratory, practicals): 40

BASIC BIBLIOGRAPHY
- Bodie Zvi, Kane Alex, Marcus Alan Essentials of Investments, McGraw Hill , (2005), , (Sixth Edition).
- Brealey R., S. C. Myers and F. Allen Principles of Corporate Finance , McGraw Hill, 2006, (8th edition)

ADITIONAL BIBLIOGRAPHY
- Grinblatt, M. and S. Titman Financial Markets and Corporate Strategy, McGraw Hill, 2003
- Bodie Zvi, Kane Alex, Marcus Alan Investments, McGRAW-HILL, 2005 (6th edition)