MF 702 – Fundamentals of Finance Fall 2014 Lectures: Instructor: Office hours: Teaching Assistants: Mon & Wed, 8-­‐11 am SMG 404 Professor Gustavo Schwenkler Office: SMG 515E Email: gas@bu.edu Mondays and Wednesdays, 1:30-­‐2:30 pm • Angie Wang, yw2@bu.edu. Office hours: Thursdays, 1-­‐2:30 pm, SMG 519 • Qing Liu, qingliu@bu.edu. Office hours: Fridays, 9:30-­‐11 am, SMG 519 Course website: https://smgtools.bu.edu/portal/site/FALL14MF702A1 This is an introductory course in asset pricing and Objectives & investment. Basic knowledge of probability and Prerequisites: calculus in one or more variables is required. There will be no required books. Still, the course will follow some chapters of the following books. Stochastic Calculus for Finance I: The Binomial Asset Pricing Model By: Steven E. Shreve Recommended ISBN: 0387249680 literature: • We will closely follow this book during the first half of the course. It gives a good introduction to no-­‐arbitrage pricing in discrete time and with discrete random variables. Options, Futures, and Other Derivatives By: John C. Hull ISBN: 0132777428 • This book is known as the Bible of Wall Street. It gives a very extensive and intuitive overview of the financial market. The content of this book will be invaluable if you want to work on Wall Street. Investment Science By: David G. Luenberger ISBN: 0195108094 • This book takes an engineering approach to finance. It is somehow mechanical in some parts, but it is very easy to read and has good examples. Introduction to the Economics and Mathematics of Financial Markets By: Jaksa Cvitanic and Fernando Zapatero ISBN: 0262033208 • This book is technical and at the same time very broad. It will give a more detailed overview of the contents in the second half of the course. 1. Introduction & overview of financial markets (Hull Ch. 1-­‐2 and 9-­‐10) 2. Probability review (Shreve Ch. 2) 3. No-­‐arbitrage pricing of options: the binomial model (Shreve Ch. 1 and 4, Hull Ch. 12) Course outline: 4. No-­‐arbitrage pricing of fixed-­‐income derivatives (Shreve Ch. 6, Hull Ch. 4) 5. The fundamental theorems of asset pricing (Shreve Ch. 2 and 3) 6. Utility and preferences (Luenberger Ch. 9, Cvitanic & Zapatero Ch. 12) 7. The Markowitz mean-­‐variance portfolio allocation problem (Luenberger Ch. 6, Cvitanic & Zapatero Ch. 12) 8. The capital asset pricing model (CAPM) (Luenberger Ch. 7, Cvitanic & Zapatero Ch. 13) 9. Relation between CAPM and no-­‐arbitrage pricing (Luenberger Ch. 7, Cvitanic & Zapatero Ch. 13) Exams: Grading: Rules: There will be a final exam in class on the last day of class: Wednesday, Oct 15, 8-­‐11 am Homework: 60% Final: 40% • There will be weekly due homework assignments • Homework is due in class by the end of the class on the due date • You can work in teams on your homework, but you need to submit your own write-­‐up of the solutions. Please give the names of your team members on your write-­‐up • No late homework will be accepted. NO EXCEPTIONS! • The final is closed-­‐book • Calculators are allowed for the final, but unnecessary • Cellular phones and other devices with built-­‐in memory must be turned off • If you cannot make it to the final, you need to let the instructor know by midnight on Tue, Oct 14, and you need to indicate a verifiable reason • If you don’t agree with the grading of either your homework or your final, you need to submit a written objection to the Teaching Assistants • Cheating will be dealt with in accordance with University policy, and may result in failure of the course