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AC.F215: Advanced Principles of Finance


Department: Accounting and Finance NCF Level: FHEQ/QCF/NQF6//RQF6
Study Level: Part II (any yr) Credit Points: 15.0
Start Date: 15-01-2018 End Date: 27-04-2018
Available for Online Enrolment?: Y Enrolment Restriction: Fully available to all students
Module Convenor: Dr S Nolte

Syllabus Rules and Pre-requisites

  • The student must take 1 modules from the following group:

CMod description

  • This module provides a detailed analysis of three key finance paradigms: decision-making under uncertainty, including utility theory; capital asset pricing and market equilibrium; and option pricing and hedging strategies. Emphasis is placed on financial concepts, theories and models such as portfolio theory, the efficient market hypothesis, and theories of capital structure.

Curriculum Design: Outline Syllabus

  • Background mathematical reading Material below is REQUIRED as part of "Prerequisites" and will NOT be covered during lectures:

    • Copeland and Weston appendix B (Matrix Algebra);
    • Copeland and Weston appendix D (Calculus and Optimization).

    Decision making under uncertainty
    ? Preference relation
    ? Expected Utility Theorem
    ? Risk Aversion, Risk Premium
    ? Absolute Risk Aversion
    ? Examples: Optimal investment in risky asset; Basic insurance contract
    ? Reading: Copeland and Weston chapter 3

    Arbitrage pricing
    ? Arbitrage
    ? State-prices
    ? Complete and incomplete markets
    ? Risk-neutral probabilities
    ? Pricing kernel
    ? Reading: Copeland and Weston chapter 4

    Mid-term test (for 2016)
    ? Monday Week 16 16-17:00 in Great Hall A.27
    ? Duration: 45 minutes.

    Derivatives pricing
    ? Dynamic behaviour of asset prices
    ? Binomial pricing model
    ? Examples: Put-Call parity; Option Pricing
    ? Reading: Copeland and Weston chapter 7

    Market equilibrium
    ? Mean-variance trade-offs
    ? CAPM
    ? Reading: Copeland and Weston chapters 5 and 6

  • 75% Exam
  • 25% Coursework

Educational Aims: Subject Specific: Knowledge, Understanding and Skills

  • This elective course provides a detailed analysis of three key Finance paradigms:

    1. Decision making under uncertainty, including:

    ? utility theory

    2. Risk-neutral pricing, including:

    ? dynamic behaviour of asset prices

    ? arbitrage pricing in complete and incomplete markets

    ? derivative securities

    ? self-financing strategies

    3. Capital asset pricing, including:

    ? mean-variance trade-offs

    ? market equilibrium

Learning Outcomes: Subject Specific: Knowledge, Understanding and Skills

  • After successful completion of the course students should be able to:

    • Apply utility theory to simple decisions faced by risk-averse individuals.

    • Carry out basic mean-variance analysis and understand its relationship with the capital asset pricing model.

    • Use the capital asset pricing model to estimate returns on risky assets.

    • Understand the link between no arbitrage, market completeness and risk-neutral pricing and what is necessary for markets to be complete and risk-neutral pricing to be appropriate.

    • Apply risk-neutral probability methods to price derivative securities and construct hedging strategies in discrete time models.

Contact Information

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