Financial Economics

Paper Code: 
24DECO 611C
Credits: 
6
Contact Hours: 
90.00
Max. Marks: 
100.00
Objective: 

1.      To acquaint the students with the basics of financial economics.

2.      To explain the concept of cash flow and the Capital Asset Pricing Model.

3.      To describe options and derivatives and patterns of corporate finance.

 

Course Outcomes: 

Course

Code

Course Title

Learning outcome (at course level)

Learning and teaching strategies

Assessment Strategies 
   

24DECO 611C

Financial Economics

(Theory)

Students will:

CO115: analyze the theory of interest and others concepts related with deterministic cash-flow streams

CO116: build models based on the portfolio mean and variance and analyze the related concepts like CAPM

CO117: elaborate the concepts of options and derivatives and analyze the related aspects

CO118: analyze the optimization of portfolio growth and discuss the general investment evaluation

CO119: analyze and explore the different aspects of corporate finance

CO120:contribute effectively in course-specific interaction

Approach in teaching: Interactive Lectures, Discussion, Case studies.

 

Learning activities for the students:

Presentations, Assignments and Group discussions

Class activity, Assignments and Semester end examinations.

 

18.00
Unit I: 
Deterministic cash-flow streams
  • Basic theory of interest - discounting and present value; internal rate of return; evaluation criteria; fixed-income securities; bond prices and yields; interest rate sensitivity and duration; immunisation
  • The term structure of interest rates; yield curves; spot rates and forward rates
  • Applied interest rate analysis – Capital budgeting, Optimum Portfolios, Dynamic cash flow processes optimal management, harmony theorem, Valuation of a firm

 

18.00
Unit II: 
Single-period random cash flows
  • Random asset returns; portfolios of assets; portfolio mean and variance; feasible combinations of mean and variance; mean-variance portfolio analysis: The Markowitz model and the two-fund theorem; risk-free assets and the one-fund theorem.
  • Capital Asset Pricing Model (CAPM), The capital market line; the capital asset pricing model; the beta of an asset and of a portfolio; security market line; use of the CAPM model in investment analysis and as a pricing formula

 

18.00
Unit III: 
Options and Derivatives
  • Introduction to derivatives and options
  • Forward and futures contracts; options; other derivatives
  • Forward and future prices; stock index futures
  • Interest rate futures; the use of futures for hedging; duration-based hedging strategies
  • Option markets; call and put options; factors affecting option prices; put-call parity
  • Option trading strategies: spreads; straddles; strips and straps; strangles
  • The principle of arbitrage
  • Discrete processes and the binomial tree model; risk-neutral valuation

 

 

18.00
Unit IV: 
General Cash Flow Streams
  • Optimal Portfolio Growth – the investment wheel, the log utility approach to growth, properties of the log – optimal strategy, Alternative approaches, Continuous time path, the feasible region, log optimal pricing formula, log optimal pricing and the black – scholes equation
  • General investment evaluation – multi period securities, risk neutral pricing, optimal pricing, the double lattice, pricing in double lattice, investment with private uncertainty, buying price analysis, continuous time evaluation

 

 

18.00
Unit V: 
Corporate Finance
  • Patterns of corporate financing - common stock; debt; preferences; convertibles;
  • Capital structure and the cost of capital;
  • Corporate debt and dividend policy;
  • The Modigliani-Miller theorem.

 

 

Essential Readings: 
  1. David G. Luenberger, Investment Science, Oxford University Press, 2nd Edition, 2013.
  2. Thomas E. Copeland, J. Fred Weston and KuldeepShastri, Financial Theory and Corporate Policy, Prentice Hall, 4th Edition, 2003.
  3. Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, McGraw Hill, 7th Edition, 2002.

 

References: 

Suggested Readings: 

  1. Chakravarty, Satya R., An Outline of Financial Economics, Anthem Press, 2014.
  2. Roy, Stephen F. Le, Werner, Jan and Ross, Stephen A., Principles of   Financial    Economics, Cambridge University Press, 1st Edition, 2001.
  3. Hull, John C., Options, Futures and Other Derivatives, Pearson Education, 6th Edition, 2005.
  4. Stephen  A.  Ross,  Randolph  W.  Westerfield  and  Bradford  D.  Jordan,
  5. Burton G. Malkiel, A Random Walk Down Wall Street, W.W. Norton & Company, 2003.
  6. William Sharpe, Gordon Alexander and Jeffery Bailey, Investments, Prentice Hall of India, 6th Edition, 2003

E-Resources:

  1. libguides.reading.ac.uk/economics/e-resources
  2.  journals.indexcopernicus.com/api/file/---
  3.  ir.inflibnet.ac.in:8443/ir/bitstream/1944
  4. worldwidescience.org/topicpages/e/economics+electronic+resource.html
  5. https://edge.sagepub.com
  6. https://libraries.ou.edu

Journals:

  1. Journal of Financial Economics

                   Scienceedirect.com/journal/journal-of-financial-economics

  1. Review of Financial Economics

                  Onlinelibrary.wiley.com/journal/18735924

 

Academic Session: 
2024-25
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