Financial Economics Spring 2011
Professor Wada, Ryosuke 和田良介
office:
room 537
phone:
27-5319
office hours: Tueseday and Thursday
17:30-18:00 in room537 or 319
email: rwada@res.otaru-uc.ac.jp
web page: http:www.otaru-uc.ac.jp/~rwada
1. Course objective and method
The objective is to understand basic concepts of financial economics.
a. optimization over time
b. asset valuation
c. risk management by derivatives
To help clear understanding, numerical exercise is emphasized. In principle, homework is assigned
every week. Many of the homework questions involve numrical calculations. It is recommended to
use software called, Mathematica as well as Excel. Its use will be explained. Mathematica 7 is
available in a study room next to International Office, Mathematica 8 is instolled in room 319 and
Computing Center Exercise Room No.2. Extra handout and homework answers will be downloadable be from the web page.
2. Course contents:
1. time value of money and discounted cash flow analysis
2. valuation of bonds and stocks
3. risk management
4. prices of derivatives; futures, forward and options contracts
The level of mathematical sophistication is elementary algebra, including sum of geometric
sequences. Its formula appears repeatedly.
3. Teaching materials
text book: Zvi Bodie,Robert Merton, David Cleeton, Financial Economics, 2nd ed. Prentice Hall,
2009.
4.Grading:
Allocation of weights will be two exams (60 %), homeworks (25%), class participation (15%).
Class participation includes asking constructive questions as well as attendance. Also, it includes
solving homework questions on black board. Working together on homeworks is encouraged.
Midterm will be 30 minute test. Numerical ability is also evaluated. If you have to leave Japan
early in July, a separate exam can be arranged.
5.Remarks:
Neat appearance and legibility of homework answers are subject to evaluation. It is encaraged to
submit homework answers as computer printouts.
Ryosuke Wada’s Bio
BA in Economics, School of Political Science and Economics, Waseda University, Tokyo, Japan
MA in Economics, Cornell University, Ithaca, New York
Ph.D in Economics, State University of New York at Stony Brook, Stony Brook, New York
Work experience: The Bank of Hiroshima for 4 years before graduate studies at SUNY Stony Brook.
1
Worked as a teaching assistant for “macro-“ and “micro economics” and an instructor of “money
and banking” at SUNY Stony Brook.
Schedule
week
0
1
date
2011/4/6
2011/4/13
2
3
2011/4/20
4
2011/4/27
5
2011/5/11
6
2011/5/18
7
2011/5/25
8
2011/6/1
9
2011/6/8
10
11
2011/6/15
2011/6/22
12
2011/6/29
13
2011/7/6
14
2011/7/13
15
2011/7/20
textbook
contents
Ch. 4
・sum of the geometric sequence
Ch. 4
Allocating Resources Over Time
・interest rate and compounding
・present value of money
Ch. 4
・loan amortization
Ch. 6
How to Analyze Investment Projects
・Net Present Value
・annualized capital cost
Ch. 6
How to Analyze Investment Projects
・Internal Rate of Return
・comparison between net present value and internal rate of return
Ch. 7
Principles of Asset Valuation
・law of one price and arbitrage
Ch. 8
Valuation of Bonds
・pure discount bond and zero rate (spot rate)
Ch. 8
・coupon bond
・coupon bond as a set of pure discount bonds
・yield to maturity
Ch. 8
Valuation of Bonds
・premium, par and discount bonds
・relationship between coupon rate and yield to maturity
Ch. 10 An Overview of Risk Management
・three dimension of risk transfer, hedging, insuring, diversifying
Ch. 11 Hedging, Insuring, and Diversifying
・hedging a risk
・swap contract
・insuring versus hedging
Ch. 14 Forward and Futures Prices
・distinctions between forward and futures contracts
30 minute mid-term exam
Ch. 14 ・relation between commodity spot and futures prices
Ch. 15 Options and Contingent Claims
・put, call, strike price, expiration date
・American and European type
Ch. 15 ・investing with options, payoff diagram
Ch. 15
・intrinsic value, time value
・put-call parity relation
・replicating portfolio
・binomial option pricing
Review
2