Course: 2021/2022

Financial Economics

(13648)

Requirements (Subjects that are assumed to be known)

- Mathematics for Economics I
- Mathematics for Economics II

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
e.Risk Management
-8. Derivatives Products
a.Types of derivatives
b.Pricing Principles
Reference text books:
- Bodie, Z., Kane, A. and Marcus, A. J. (2017), Investments, McGraw Hill (10th. Edition).
- Brealey R., S. C. Myers and F. Allen (2016), Principles of Corporate Finance, 12th edition, McGraw Hill.
Other useful books:
- Marín, J.M. and G. Rubio (2011), Economía Financiera, Antoni Bosch.
- Essentials of Corporate Finance, 9/e edition, Stephen Ross, Jeffrey Jaffe, and Randolph Westerfield, 2017

Learning activities and methodology

Learning activities comprise:
1.- Theory - Sessions. The instructor of the course teach the basic concepts of the topic. Classnotes are provided to the students.
2.- Solution to exercises. The student must solve the test to assess his/her degree of knowledge of the different concepts.
3.- Exercises - Sessions. The instructor of these sessions solves the exercise sets provided to the students.

Assessment System

- % end-of-term-examination 50
- % of continuous assessment (assigments, laboratory, practicals...) 50

Basic Bibliography

- Brealey, Myers and Allen . Principles of Corporate Finance 12/e. McGraw-Hill,. 2017
- Zvi Bodie, Alex Kane, and Alan J. Marcus. Essentials of Investments, 10th Edition. McGraw-Hill Irwin. 2017

Additional Bibliography

- Mark Grinblatt and Sheridan Titman. Financial Markets and Corporate Strategy. McGraw-Hill. 2011
- Ross, Westerfield and Jordan . Essentials of Corporate Finance, 8/e. McGraw-Hill-Irwin. 2013

Detailed subject contents or complementary information about assessment system of B.T.

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