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ECO605 : Financial Economics

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Course Info
Course Category	Economics
Course Level	Undergraduate
Credit Hours	3
Pre-requisites	N/A
Instructor	Dr Humaira Asad Ph.D. Economics University of Exeter, UK,

Course Contents
What is Financial Economics? Finance and Financial System Why Study Financial Economics? Financial Decisions Management and Ownership of a Business Financial Markets and Institutions Financial Innovation and the Invisible Hand Financial Markets Financial Market Rates Rates of Return on Risky Assets Market Indexes and Market Indexing Inflation and Real Interest Rates Interest Rate Equalization The Fundamental Determinants of Rates of Return Financial Intermediaries Financial Intermediaries in Pakistan Yield Curve Anomaly in the Bond Market and the Recession Germany's Inflation Linked Bonds Financial Infrastructure and Regulation Regulation by Government Regional and World Organizations Functions of Financial Statements Financial Statements - Balance Sheet Income Statement Structure of Income Statement Cash Flow Statement Notes to Financial Statements Market Values versus Book Values Limitations of Book Value and Market Value Compring Book and Market Value Price-to-book (P/B) Ratio Accounting versus Economic Measures of Income Financial Ratios Return on Equity (ROE) Profitability Ratios Return on Assets (ROA) Comparison between ROA and ROE Asset Turnover Ratio Inventory Turnover Ratio Inventory Turnover Ratio- Calculation Asset Turnover Ratio Asset Turnover Ratio - Example Financial Leverage Ratios Financial Leverage Ratio-Times Interest Earned (TIE) Financial Leverage Ratio- Debt to Equity Ratio Liquidity Ratios Current Ratio and Quick Ratio Market Value Ratios Market Price to Book Ratio The Relations among Ratios The Effects of Financial Leverage Relationship of ROE, ROA and Leverage The Financial Planning Process Firm’s Sustainable Growth Rate Working Capital Management Cash Conversion Cycle (CCC) Interest Rates Yield to Maturity – Coupon Bond Yield to Maturity – Discount Bond Interest Rates and Returns Rate of Return - Formula Interest Rates, Returns and Years to Maturity Interest Rate Risk Determinants of Asset Demand Theory of Portfolio Choice Demand in the Bond Market Supply in the Bond Market Equilibrium in the Bond Market Shifts in the Demand for Bonds Shifts in the Supply of Bonds Fisher Effect Risk Structure of Interest Rates Default Risk and Rating Agencies Rating Agencies - Example Risk Structure of Interest Rates - Liquidity Risk Structure of Interest Rates - Tax Risk Structure of Interest Rates- Term to Maturity Facts about the Yield Curves The Expectations Theory Segmented Markets Theory Liquidity Premium Theory Preferred Habitat Theory Interpreting Yield Curves, 1980–2017 Common Stock Computing the Price of a Common Stock The One-Period Valuation Model - Example The Generalized Dividend Valuation Model The Theory of Rational Expectations Efficient Market Hypothesis Rationale behind Efficient Market Hypothesis Random-Walk Behavior of Stock Prices Forms of Efficient Market Hypothesis (EMH) Evidence in Favor of Efficient Market Hypothesis Evidence Against Efficient Market Hypothesis Behavioral Finance Basic Facts about Financial Structure Transaction Costs Financial Intermediaries and Transaction Costs Asymmetric Information The Lemons Problem Tools to Help Solve Adverse Selection (Lemons) Problem Free Rider Problem Government regulation to increase information Tools to reduce adverse selection-Financial Intermediation Adverse Selection, Collateral and Net Worth Adverse Selection and Net Worth Moral Hazard and the choice between Debt and Equity The principal–agent problem - Example Tools to Help Solve the Principal–Agent Problem Principal–Agent Problem: Government Regulation Principal–Agent Problem: Financial Intermediation Principles of Risk Management Risk Management Risk Exposure Risk and Economic Decisions Risks facing Households Risks facing Firms Physical and Location Risks facing Firms Human and Technology Risks facing Firms Strategic Risks facing Firms Role of Government in Risk Management The Risk-Management Process Risk Assessment Risk Management Techniques The Three Dimensions of Risk Transfer Risk Transfer and Economic Efficiency Institutions for Risk Management Probability Distribution of Returns Expected Rate of Return Expected Rate of Return – Microsoft Excel Volatility Calculation of Standard Deviation of Expected Rate of Return Using Forward and Futures Contracts to Hedge Risk Forward Contract - Example Hedging Price Risk with Futures Contracts Hedging Foreign-Exchange Risk with Swap Contracts Hedging Forex Risk with Swap Contracts-Example Hedging Shortfall Risk by Matching Assets to Liabilities Minimizing the Cost of Hedging Insuring versus Hedging Basic Features of Insurance Contracts Financial Guarantees Caps and Floors on Interest Rates Options as Insurance The Diversification Principle The Diversification Principle- Probability Distribution Nondiversifiable Risk Diversification and the Cost of Insurance The Process of Personal Portfolio Selection Personal Portfolio Selection – Life Cycle Personal Portfolio Selection – Time Horizons Personal Portfolio Selection – Risk Tolerance Portfolio Selection – Role of Professional Asset Managers Portfolio Optimization Framework Used by Professional Portfolio Managers Formula for the Trade-off Line Portfolio Composition and an Expected Rate of Return Portfolio Composition and Standard Deviation Achieving a Target Expected Return Portfolio Efficiency Efficient Frontier Efficient Diversification with Many Risky Assets Optimal Combination of Risky Assets Selection of the Preferred Portfolio Portfolios of Many Risky Assets Capital Asset Pricing Model (CAPM) Capital Market Line (CML) Determinants of the Risk Premium on the Market Portfolio Active and Passive Investing Beta and Risk Premiums on Individual Securities Security Market Line Using the CAPM in Portfolio Selection Indexing in Financial Markets Alpha Fund and the Security Market Line Valuation and Regulating Rates of Return Cost of Capital Regulation and Cost-Plus Pricing Modifications and Alternatives to the CAPM Forward and Futures Market Distinctions between Forward and Future Contracts The Economic Functions of Future Markets The Role of Speculators Relation between Commodity Spot and Futures Prices Extracting Information from Commodity Futures Prices Forward-Spot Price Parity for Gold The Implied Cost of Carry Financial Futures Financial Futures - Example Implied Riskless Rate Forward Price and Future Spot Price Forward-Spot Price-Parity Relation with Cash Payouts Implied Dividends Foreign-Exchange Parity Relation The Role of Expectations in Determining Exchange Rates Pricing of Swap Contracts Foreign Exchange Market Importance of Foreign Exchange How is Foreign Exchange Traded? Exchange Rates in the Long Run - Law of One Price Theory of Purchasing Power Parity Factors that affect Exchange Rates in the long run Exchange Rates in the Short Run Pakistan's Exchange Rate Behavioral Finance Overconfidence and Investment Loss Aversion Inertia Framing Modern and Behavioral Portfolio Theories Managing Diversification Using or Misusing Information Group Behavior Managing the Biases The Expected Utility Model The No-Arbitrage Pricing Principle Arbitrage Pricing Model Financial Structure of a Firm Internal and External Sources of Finance Equity Financing Debt Financing Capital Structure and Factors Causing Friction Creating Value through Financing Decisions Capital Structure and Reducing Costs Types of Capitalization Structures Financing Decisions Five Financing Methods How to Evaluate Levered Investments? Flows to Equity (FTE) Weighted Average Cost of Capital (WACC) How Options Work? Index Options Investing with Options Put Options Payoff Diagram Put-Call Parity Short Selling Volatility and Option Prices The Black-Scholes Model

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