NYU Stern School of Business

Undergraduate College

C15.0002.004: FOUNDATIONS OF FINANCIAL MARKETS

Fall 2010

Instructor Details

Whitelaw, Robert

rwhitela@stern.nyu.edu

212 998-0338

TR ?? or by appointment

KMC 9-69

 

Course Meetings

TR, 9:30am to 10:45am

Tisch T-201


Final Exam:

Schedule exceptions
    Class will not meet on: Thurs., Nov. 25
    Class will meet on:

 

Course Description and Learning Goals

This course is a rigorous, quantitative introduction to financial market structure and financial asset valuation. The main topics of the course are arbitrage, portfolio selection, equilibrium asset pricing (CAPM), fixed income securities and derivative pricing. You are expected to understand valuation formulas and be able to apply them to new problems. The appropriate tools necessary for solving these problems will be developed at each stage and practiced in the homework assignments. The models we will cover have immediate applications and implications for real-world financial decisions. Every effort will be made to relate the course material to current financial news.

 

Course Pre-Requisites

To take this course, students must be comfortable with statistics, linear algebra, calculus, and microeconomics.

 

Course Outline

The problem sets are listed in the session when they are due (see the last page for dates). BKM refers to Bodie, Kane and Marcus, Essentials of Investments, and RWJ refers to Ross, Westerfield, and Jordan, Essentials of Corporate Finance. Readings should be done prior to the class session in which the material is discussed.

Session

Date

Topics

Assignments

1

Tues., Sept. 7

Introduction

Course overview

 

2

Thurs., Sept. 9

Financial Instruments

Read: BKM 1, 2

3

Tues., Sept. 14

Financial Markets

Read: BKM 3

4

Thurs., Sept. 16

Principles of Valuation

Time value of money—PV, FV, annuities, perpetuities

Read: RWJ 4, 5.1-5.2, 8.1, 8.4

5

Tues., Sept. 21

Performance Measurement

Compounding and return measures

Read: BKM 5.1, RWJ 5.3-5.4

6

Thurs., Sept. 23

Portfolio Theory I

Portfolio returns

Combining 2 risky assets

Read: BKM 5.2-5.3, 6.1-6.2

Problem Set 1

7

Tues., Sept. 28

Portfolio Theory II

Investor preferences

Efficient portfolios

 

8

Thurs., Sept. 30

Portfolio Theory III

Adding a riskless asset

Read: BKM 5.4-5.6, 6.3

9

Tues., Oct. 5

Portfolio Theory IV

Multiple risky assets

Read: BKM 6.4-6.6

Problem Set 2

10

Thurs., Oct. 7

The CAPM I

Equilibrium asset pricing

Read: BKM 7.1-7.2

11

Tues., Oct. 12

The CAPM II

Applying the CAPM

Read: BKM 7.3-7.5

12

Thurs., Oct. 14

Market Efficiency

The efficient market hypothesis

Behavioral finance

Read: BKM 8, 9

Problem Set 3

13

Tues., Oct. 19

Review/Problem Session

Study!

14

Thurs., Oct. 21

Midterm Exam

 

Session

Date

Topics

Assignments

15

Tues., Oct. 26

Equity Valuation I

Valuation ratios

Dividend discount models

Read: BKM 13

16

Thurs., Oct. 28

Equity Valuation II

 

17

Tues., Nov. 2

Arbitrage

Arbitrage and the law of one price

 

18

Thurs., Nov. 4

Fixed Income Securities I

Bond prices and yields

Read: BKM 2.1-2.2, 10.1-10.4

Problem Set 4

19

Tues., Nov. 9

Fixed Income Securities II

Forward rates and the yield curve

Read: BKM 10.6

20

Thurs., Nov. 11

Fixed Income Securities III

Interest rate risk and default risk

Read: BKM 10.5, 11.1, 11.3

21

Tues., Nov. 16

Fixed Income Securities IV

Interest rate risk management and active management

Read: BKM 11.2, 11.4

22

Thurs., Nov. 18

Options I

Options markets and option payoffs

Read: BKM 15

Problem Set 5

23

Tues., Nov. 23

Options II

Option strategies and the determinants of option value

Read: BKM 16.1-16.2

24

Tues., Nov. 30

Options III

Binomial and Black-Scholes option pricing

Read: BKM 16.3-16.5

25

Thurs., Dec. 2

Futures

Forward and futures contracts

Read: BKM 17.1-17.5

26

Tues., Dec. 7

Swaps

Read: BKM 17.6

27

Thurs., Dec. 9

Investment Management

Mutual funds, hedge funds and performance evaluation

Read: BKM 4, 18

Problem Set 6

28

Tues., Dec. 14

Review/Problem Session

Study!

 

Required Course Materials

The main textbook for the course is

            Zvi Bodie, Alex Kane, and Alan J. Marcus, Essentials of Investments, 7th Edition, McGraw-Hill Irwin, 2008.

The text comes with a solutions manual for the end-of-chapter problems. Further required material is in the custom published version of selected chapters from

            Stephen A. Ross, Randolph W. Westerfield, and Bardford D. Jordan, Essentials of Corporate Finance, 6th Edition, McGraw-Hill Irwin, 2008.

The 3 chapters in this extract, along with material from the associated Student Problem Manual, are in a soft-bound book. All three books should come shrink-wrapped together in the bookstore.

There is an optional book

            Craig W. Holden, Excel Modeling and Estimation in the Fundamentals of Investments, 3rd Edition, Pearson Prentice Hall, 2009.

that is useful for those with limited knowledge or experience with the Excel tools used in this course.

There will be lecture notes, handouts, and supplementary materials (e.g., sample Excel spreadsheets) for many classes. Lecture notes and handouts will be distributed at the beginning of class, and they will also be available on Blackboard, usually before the relevant class session. Extra copies of these materials will not be available in my office. If you miss or lose the handouts, you should print them out from Blackboard. The supplementary materials will also be available on Blackboard, as will links to other relevant information.

Finally, you need a calculator for this class. It is a distinct advantage to have a financial calculator, but not an absolute requirement. However, if you plan to take other finance classes, you will get good use out of a financial calculator.

 

Assessment Components

The final grade will be calculated as follows:

                                    Class participation                               10%

                                    Problem sets                                         15%

                                    Midterm exam                                        30%

                                    Final exam                                              45%

 

Grading

At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general, students in undergraduate core courses can expect a grading distribution where: 

Note that while the School uses these ranges as a guide, the actual distribution for this course and your own grade will depend upon how well you actually perform in this course.

 

Re-Grading

The process of assigning grades is intended to be one of unbiased evaluation. Students are encouraged to respect the integrity and authority of the professor’s grading system and are discouraged from pursuing arbitrary challenges to it.

If you believe an inadvertent error has been made in the grading of an individual assignment or in assessing an overall course grade, a request to have the grade re-evaluated may be submitted. You must submit such requests in writing to me within 7 days of receiving the grade, including a brief written statement of why you believe that an error in grading has been made.

 

Professional Responsibilities For This Course

Attendance

 

Participation

In-class contribution is a significant part of your grade and an important part of our shared learning experience. Your active participation helps me to evaluate your overall performance.
You can excel in this area if you come to class on time and contribute to the course by:

 

Assignments

 

Classroom Norms

 

Stern Policies

General Behavior
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior.  Students who fail to do so may be asked to leave the classroom. 

 

Collaboration on Graded Assignments
Students may not work together on graded assignment unless the instructor gives express permission. 

 

Course Evaluations
Course evaluations are important to us and to students who come after you.  Please complete them thoughtfully.

 

Academic Integrity

Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:

The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:

Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505

To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin.  Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications.  Additionally, your document will become part of the Turnitin database.

 

Recording of Classes

Your class may be recorded for educational purposes

 

Students with Disabilities

If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 998-4980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend.  If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.

 

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