ASRM 410. Investment & Financial Markets
This course aims to develop the knowledge of the theoretical foundation of Corporate Finance and Financial Models and the application of those models to insurance and other financial risks. This course prepares the Investment and Financial Markets (IFM) examination by the Society of Actuaries (SOA) and the Financial Economics examination (Exam 3F) by the Casualty Actuarial Society (CAS).
Topics include mean-variance portfolio theory, asset pricing models, market efficiency and behavioral finance, investment risk and project analysis, capital structure, introductory derivatives – forwards and futures, general properties of options, binomial pricing models, Black–Scholes option pricing model, and option Greeks and risk management.
Textbooks:
- (Mandatory) McDonald, R. L. (2013), Derivatives Markets, 3rd edition, Pearson.
- (Recommended) Berk, J. B. and DeMarzo, P. M. (2017), Corporate Finance, 4th edition, Pearson.
Learning Objectives:
- Students will understand the assumptions of mean-variance portfolio theory and its principal results.
- Students will understand different methods for the valuation of asset portfolios and explain their appropriateness in different situations.
- Students will understand the notion of efficient markets and explain why market participants may make irrational systematic errors, leading to market inefficiencies.
- Students will understand different ways to measure investment risk and conduct project analysis using advanced techniques used in capital budgeting.
- Students will understand the factors that a company has to consider when deciding its capital structure.
- Students will understand how forward contracts and futures contracts can be used in conjunction with the underlying asset in a risk management context.
- Students will understand how call options and put options can be used in conjunction with the underlying asset in a risk management context.
- Students will understand how binomial trees can be used to approximate the prices of both European and American call and put options on various underlying assets.
- Students will understand how the Black-Scholes Formula can be used to form the prices of European call and put options on various underlying assets.
- Students will understand the importance of Option Greeks and risk management techniques in forming hedged asset portfolios that include positions in both options and the underlying asset.
Course Calendar:
|
Class Meeting |
Topics |
|
1 |
Derivative markets |
|
2 |
Forward contracts |
|
3 |
Variations on forwards |
|
4 |
Option contracts |
|
5 |
Variations on options |
|
6 |
Put-call parity |
|
7 |
Comparing options |
|
8 |
Single period binomial model |
|
9 |
General binomial model I |
|
10 |
General binomial model II |
|
11 |
Stock price model I |
|
12 |
Stock price model II |
|
13 |
Black-Scholes formula I |
|
14 |
Midterm Examination 1 |
|
15 |
Black-Scholes formula II |
|
16 |
Option Greeks and elasticity |
|
17 |
Delta hedging |
|
18 |
Exotic options I |
|
19 |
Exotic options II |
|
20 |
Project analysis |
|
21 |
Monte Carlo simulation |
|
22 |
Midterm Examination 2 |
|
23 |
Efficient market hypothesis |
|
24 |
Capital asset pricing model |
|
25 |
Cost of capital |
|
26 |
Behavioral finance and multifactor models |
|
27 |
Capital structure |
|
28 |
Real options |
|
29 |
Actuarial applications of options |
|
30 |
Final Examination |