ECO4053S - Financial Economics I

Course Information

The course introduces students to financial markets, including: purposes and functions; portfolio theory; the efficient markets hypothesis; introduction to futures markets and their practical operation; pricing of forward contracts; the mechanics of swaps; trade in options and forward interest rate agreements.

Description

This is a twelve-lecture, eighteen-hour course in the theory of finance. Objective: a solid introduction to the study of capital markets. (Honours courses at UCT include advanced undergraduate and introductory graduate material. This course is somewhat closer to the latter.) Previous coursework in introductory finance will help but is not required. Comfort with (or tolerance for) the application of basic mathematics to the precise expression of economic ideas is indispensable. Please revise basic probability (particularly, random variables, conditional expectations, and the normal distribution) and matrix algebra before the course starts. Always study the required readings (pencil and paper in hand) before each class.

Syllabus

Stocks; fundamentals, noise and bubbles; expected utility; risk aversion; mean-variance analysis; simple derivation of the capital asset pricing model; simple derivation of the arbitrage pricing model; applications and empirical tests; introduction to asset pricing with the stochastic discount factor; investment appraisal; capital structure; takeovers; introduction to fixed income; duration; mechanics of derivative markets; futures and forwards; options; the binomial model; introduction to the Black-Scholes model; applications.

Main textbooks

Luenberger, D. 1998. Investment Science. New York: Oxford University Press.
Hull, J. 2005. Options, Futures and Other Derivatives, nth edition. New Jersey: Prentice-Hall.
Grinblatt, D. and S. Titman. 1998. Financial Markets and Corporate Strategy. New York: McGraw-Hill.