Module Code and Title:       DEV307          Financial Markets and Instruments (Elective 2)

Programme:                          BA in Development Economics

Credit Value:                         12

Module Tutor:                       Sanjeev Mehta                                                                            

General objective: This module introduces students to the economics of finance. Some of the basic models used to benchmark valuation of assets and derivatives are studied in detail; these include the CAPM, and the Binomial Option Pricing models. The module ends with a brief introduction to corporate finance.

Learning outcomes – On completion of this module, learners should be able to:

1. Analyse basic theories of investment.
2. Simulate the investment decisions process.
3. Analyse a financial portfolio.
4. Assess the risk for the investors from a financial portfolio.
5. Calculate highest possible rate of return for a given level of risk.
6. Describe asset allocation processes.
7. Explain basic movements in stock prices.
8. Analyse the role of institutional arrangements in securities markets.
9. Distinguish between the various forms of derivatives instruments.
10. Apply the concepts of options and futures contracts for tactical portfolio strategies.
11. Explain what options and futures are, and their use as hedging instruments.

Learning and Teaching Approach: This module will be taught by means of lectures, tutorials, case study, classroom workshops and self-directed study. Lectures will aim at explanation of various concepts and theories. Tutorials will be an integral part of the module, and it is expected that much of the learning and application of econometric concepts will be achieved through these tutorials. Students will also use cross sectional/ country specific case study for better understanding.

Assessment Approach:

A. Individual Assignment: Portion of Final Marks: 10%

Each student will complete an assignment related to investment theory. Assignment should have a maximum limit of 400 words.

• 1%       Adequacy of references used
• 2%       Methodology Defining the concepts
• 2%       Use of effective analytical tool
• 4%       Analysis and discussion on findings
• 1%       Conclusion

B. Class Tests (2): Portion of Final Marks: 20%

Two written tests (10% each) will be conducted for 45 min durationeach and cover 4 weeks of material. Approximately half of the questions will aim at explaining and applying a model.

C. Individual project: Portion of Final Mark: 20%

The project will be given after midterm exams. A student will be required to prepare a complete report on a portfolio simulation project. Report word limit: 750 words.

• 3%       Description of the simulation model
• 2%       Methodology
• 7%       Discussion on findings
• 2%       Timely submission of the report
• 2%       Structure of the report
• 2%       Presentation of report
• 2%       Defence of the work in Q&A session

D. Midterm Examination: Portion of Final Mark: 20%

Students will take a written exam of 1.5 hr duration covering topics up to the mid-point of the semester.

Pre-requisites: DEV308 Industrial Economics

Subject matter:

1. Investment Theory and Portfolio Analysis (a. Deterministic cash-flow streams)
   • Basic theory of interest, discounting and present value
   • Internal rate of return; evaluation criteria, fixed-income securities
   • Bond prices and yields, interest rate sensitivity and duration, immunization
   • Term structure of interest rates, yield curves
   • Spot rates and forward rates
2. Investment Theory and Portfolio Analysis (Single-period random cash flows)
   • Random asset returns, portfolios of assets
   • Portfolio mean and variance, feasible combinations of mean and variance
   • Mean-variance portfolio analysis: the Markowitz model and the two-fund theorem
   • Risk-free assets and the one-fund theorem
3. Options and Derivatives
   • Introduction to derivatives and options
   • Forward and futures contracts, options, other derivatives
   • Forward and future prices, stock index futures; interest rate futures
   • Use of futures for hedging, duration-based hedging strategies
   • Option markets, call and put options; factors affecting option prices, put-call parity
   • Option trading strategies: spreads, straddles, strips and straps, strangles
   • Principle of arbitrage
   • Discrete processes and the binomial tree model
   • Risk neutral valuation
4. Corporate Finance
   • Patterns of corporate financing: common stock, debt, preferences, convertibles
   • Capital structure and the cost of capital
   • Corporate debt and dividend policy
   • Modigliani-Miller theorem

Reading List:

1. Essential Reading
   • Copeland, T.E., Weston, J. F. & Shastri, K. (2003). Financial Theory and Corporate Policy. Prentice Hall.
   • Luenberger, D. G. (1997). Investment Science. Oxford University Press, USA.
2. Additional Reading
   • Brealey, R. A. & Myers, S.C. (2002). Principles of Corporate Finance. McGraw- Hill.
   • Hull, J. C. (2005). Options, Futures and Other Derivatives. Pearson Education.
   • Malkiel, B.G. (2003). A Random Walk Down Wall Street. W.W. Norton & Company.
   • Ross, S. A., Westerfield, R. W. & Jordan, B.D. (2005). Fundamentals of Corporate Finance. McGraw-Hill.
   • Sharpe, W., Alexander, G. & Bailey, J. (2003). Investments. Prentice Hall of India.

Date: January 15, 2016