Introduction

This course is an introduction to the investment and financial market with applications of mathematics to pricing and hedging options, efficient market hypothesis, evaluation of the investment risk and stock analysis, capital structures, and derivative instruments in risk management

Prerequisites: MA 542

Course Objective

• Students will learn about mean variance portfolio theory and results.
• Students will be introduced to various models of assets portfolios and explain their assumption and appropriate applications.
• Students will understand the concept of efficient markets, and methods to avoid irrational errors and market inefficiencies.
• Students will understand different methods to measure and analyze investment risk, and techniques for capital budgeting.
• Students will understand the components of capital structures.
• Students will understand derivative instruments, and their applications to risk management.
• Students will understand options with applications to assets in risk management.
• Students will understand different pricing models with applications to options and assets.
• Students will understand the importance of risk management in hedged asset portfolios.

Course Outcomes

• Students will understand mathematics and statistics of portfolios and perform mean-variance analysis.
• Students will understand three forms of efficient market hypothesis, and identify empirical evidence for or against each of the hypothesis.
• Students will be able to discuss the advantage and disadvantage of different measures of investment risk and conduct risk analysis.
• Students will understand different methods to raise capital and describe the effect of capital structures on companies.
• Students will understand main derivative instruments and will be able to calculate transaction costs affecting profit, as well as describing forward and prepaid forward contracts.
• Students will be able to explain the characteristics of options in risk management and calculate payoffs and profit using option strategies.
• Students will understand approaches to evaluate derivative securities, hedging options and stocks using pricing models, and will be able to calculate probability, percentiles means and variance of stock prices.
• Students will be able to calculate and explain option Greeks and apply options and derivatives to risk management.

Textbook

• Derivative Market (3rd edition) by McDonald, R. L. Pearson Education
  
• Corporate Finance (4th edition) by Berk, J. and DeMarzo, P., Pearson.
  

Grading Policies

		Weights
1	Homework	30%
2	Mid-term	30%
3	Final	25%
4	Project	15%
	Maximum Possible	100%