Capital markets, derivatives & corporate finance

The course aims to provide students with an advanced understanding of pure theories of finance, their empirical strengths in the light of applied econometric studies, and their application in the context of emerging markets and developing economies.

The course is organised around the concept of the pricing of risk. It gives a comprehensive analysis of:

• mean-variance portfolio theory, the capital asset pricing model and arbitrage pricing theory;
• the efficient markets hypothesis;
• debt-equity ratios, focusing on agency cost models and an introduction to contract theory;
• analysis of options and other derivatives.

Students pursuing a degree external to the Department of Economics should contact the convenor for approval to take this module.

Objectives and learning outcomes of the module

Objectives

The objective of this course is to teach students elements of the pure theory of banking and finance as well as familiarizing them with empirical studies of financial market behaviour. Teaching focuses on the operations of banking and on the determination of financial asset prices in a variety of markets. Consequently, the objectives of the course are:

• To give students a firm grounding in risk-return analysis in financial market operations and enterprise finance.
• To familiarise students with the theory of derivative asset pricing.
• To provide students with theoretical and institutional analysis of the operations of stock-markets and banks.

On successful completion of the course, students should be:

• Able to define and deploy several theories of financial price. In particular, students should have a firm grounding in risk-return analysis of financial market operations; they should be familiar with the CAPM; they should be able to discuss corporate finance theory; they should command models of financial intermediation; they should be able to discuss and apply the theory of derivatives pricing.
• Aware of empirical and institutional aspects of financial markets. They should be able to categorise and debate econometeric work on financial markets and financial price; they should also be familiar with the institutional structure of key stock markets in developed and developing countries as well as futures and derivative markets, including the mechanisms of collecting and distributing information.
• Capable of solving technical problems of determination of financial price and financial returns in a variety of markets and involving a variety of theories. This skill will have been developed in the context of seminar work.
• Capable of assessing the validity of mainstream theories of finance in developed countries. More than that, they should be able to summarise the social and economic conditions that raise doubts about the applicability of mainstream theories of finance to developing countries. They should have the capacity to evaluate theories of finance from the perspective of a development economist.

Method of assessment

Assessment weighting: Exam 70% / coursework 30% (1 essay). All coursework is resubmittable.

Suggested reading

• Copeland, T.E. & Weston, J.F., Financial Theory and Corporate Policy , Addison-Wesley, 1988.
• Edwards, F. & Ma, C., Futures and Options , McGraw Hill: New York, 1992.
• Elton, E. & Gruber, M.J., Modern Portfolio Theory and Investment Analysis , 5th edition, J. Wiley, New York, 1995.

Disclaimer

Important notice regarding changes to programmes and modules