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KFIN 2680A - Financial Markets

Type d'enseignement : Seminar

Semester : Autumn 2017-2018

Number of hours : 58

Language of tuition : English

Pre-requisite

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Course Description

This course aims to familiarize students with the workings of financial markets and the fundamental tools of asset valuation. Three important asset classes are covered: bonds, stocks and derivatives. The present-value formula is the cornerstone of asset valuation and constitutes our starting point. It is first used in the context of fixed-income securities, where we focus mainly on the valuation of riskfree bonds – emphasizing the relation between bond valuation and absence of arbitrage. Next, we move to stocks. Basic notions of statistics and probability are introduced, in relation to the fundamental concepts of risk, return and diversification. We formalize the trade-off between risk and return in the context of portfolio theory, and examine how risk is priced in equilibrium according to the capital asset pricing model (CAPM). Risk-adjusted discount rates are then used in present-value calculations for the purpose of stock valuation. We then ask whether the market values stocks efficiently, or whether there are “abnormal” returns leading to large profits that are not fair compensation for risk. Finally, we turn to derivatives – namely, futures and options. After an overview of derivatives' main uses, we cover the pricing of forward and futures as well as option valuation models, emphasizing again the relation between valuation and no-arbitrage. If time permits, the course ends with a brief discussion of credit derivatives and the role of securitization in the subprime crisis.

Teachers

  • GUIBAUD, Stéphane (Assistant Professor of Finance, Department of Economics, Sciences Po)
  • ZAGO, Riccardo (Phd Student (Tutorial sessions))

Pedagogical format

The lectures are based on typed-up notes which will be available on the course webpage. To supplement the lecture notes, the following textbook is highly recommended: Z. Bodie, A. Kane and A. Marcus, Investments, McGraw Hill.

Course validation

Lectures will run over 12 weeks and will be held on Tuesday from 8.00 am to 10.00 am. The course will be assessed through a mid-term exam (“galop”, counting for 40% of the course grade) and a final exam (counting for 60% of the course grade).