| Learning objectives |
At the end of this course, students should be
able to:
- Determine the impact of an event on an asset’s price by
identifying required data, implementing standard event study
methodology, and interpreting the results
- Perform returns-based style analysis in order to determine the
investment style used by a manager and to determine the extent of
any style drift over time
- Understand the concepts associated with mean-variance portfolio
choice, the key issues identified with this approach, and several
covariance estimation techniques used to improve the practical
effectiveness of the approach
- Understand a variety of standard asset allocation strategies
and their properties
- Understand and implement several approaches to option
valuation
- Understand the use of options and possess the ability to build
models allowing the evaluation of option-based investment
strategies
|
| Course prerequisites |
| Students should have successfully completed an
introductory graduate finance course. Also, since this course has
an emphasis on model implementation via MS Excel, a basic
familiarity with the use of spreadsheets will be helpful. |
| Prerequisites for registering for the
exam |
|
Number of mandatory
activities: 1
Compulsory assignments
(assessed approved/not approved)
Mandatory Mid-term Assignment: The Mid-term Assignment will
require student groups to present their designs and analysis of a
hypothetical financial product.
|
| Examination |
|
4-hours
Written Exam:
|
| Exam
ECTS |
7,5 |
| Examination form |
Written sit-in exam |
| Individual or group exam |
Individual |
| Assignment type |
Written assignment |
| Duration |
4 hours |
| Grading scale |
7-step scale |
| Examiner(s) |
One internal examiner |
| Exam period |
Summer Term |
| Aids allowed to bring
to the exam |
Limited aids, see the list below and the exam
plan/guidelines for further information:
- Allowed calculators
- Allowed dictionaries
|
| Make-up exam/re-exam |
Same examination form as the ordinary exam
If the number of registered candidates for the make-up
examination/re-take examination warrants that it may most
appropriately be held as an oral examination, the programme office
will inform the students that the make-up examination/re-take
examination will be held as an oral examination
instead.
|
Description of the exam
procedure
Extra help aids - Notes brought by the
examinee: one A4 page of
notes
|
|
| Course content and structure |
The goals of this course are two-fold. First, to
provide students with an in-depth understanding of key models used
in practice in the areas of Investments and Derivatives. The second
goal is to provide students with the skills and techniques required
to effectively implement models using MS Excel. This course will
provide students with hands-on experience in the integration of
financial and statistical concepts and techniques in order to
construct financial models and the use of these models to analyze
problems and develop solutions.
The course will cover models used in the following areas:
- Option pricing, hedging, and option use in investment
strategies
- Monte Carlo simulation
- Structured product design and analysis
- Asset allocation investment strategies
- Mean-variance portfolio choice
- Event studies
- Investment style analysis
The course’s Preliminary Assignment will require students to
prepare solutions to a number of short problems. For the Mid-term
Assignment students will work in groups to create a hypothetical
retail structured product requiring students to design and value
the product, quantify its inherent financial risks, and propose a
hedging strategy with each group presenting its work to the class.
The course will assist students in developing analytical skills and
presentation skills.
Class Schedule
| Class | Topic | | Class 1 | Options: Introduction, Binomial Option
Pricing Model | | Class 2 | Modeling Stock Prices, Black-Scholes
Option Pricing Model, Structured Products | | Class 3 | Preliminary Assignment, Option
Sensitivities and Hedging, MC Simulation
Class held in computer lab. | | Class 4 | Portfolio Insurance, Option-based
Investment Strategies | | Class 5 | Mandatory Mid-term Assignment | | Class 6 | Portfolio Insurance Option-based
Investment Strategies | | Class 7 | Mean-Variance Optimization, Covariance
Estimation | | Class 8 | Beta Estimation, Constrained Portfolio
Choice
Class held in computer lab. | | Class 9 | Event Studies | | Class 10 | Style Analysis
Class held in computer lab. | | Class 11 | Comprehensive
Review |
Schedule with readings referenced
| Class | Topic | Readings | | 1 | Options: Introduction
Binomial Option Pricing Model | Text: Chapters 16, 17
Other Reading: CRR
| | 2 | Modeling Stock Prices
Black-Scholes Option Pricing Model
Structured Products
| Text: Chapters 18, 19
Other Reading: Walker, Helberger | | 3 LAB | Option Sensitivities and Hedging
Monte Carlo Simulation | Text: Chapters 20, 22, 23
Other Reading: Kritzman 1
| | 4 | Portfolio Insurance
Option-based Investment Strategies
| Text: Chapter 21
Other Reading: Green, Aggarwal | | 5 | Midterm Assignments – Presentations
| | | 6 | Asset Allocation Strategies
| Text: Chapter 22
Other Reading: Perold, Tezel, Scott | | 7 | Mean-Variance Optimization
Covariance Estimation
| Text: Chapters 8, 9, 10
Other Reading: Statman | | 8-LAB | Beta Estimation
Constrained Portfolio Choice
| Text: Chapters 11, 12
Other Reading: Geczy | | 9 | Event Studies
| Text: Chapter 14
Other Reading: Fama, Henderson | | 10-LAB | Style Analysis
| Other Reading: Rekenthaler,
Sharpe | | 11 | Comprehensive Review | |
|
| Teaching methods |
| Lectures, based when possible on the analysis of
real-world situations. In addition, three classes will be held in a
computer lab, and will focus on techniques required for effective
implementation of models. |
| Further Information |
| Preliminary Assignment: To help students get
maximum value from ISUP courses, instructors provide a reading or a
small number of readings or video clips to be read or viewed before
the start of classes with a related task scheduled for class 3 in
order to 'jump-start' the learning process. |
| Expected literature |
|
Required Text: Simon Benninga,
Financial
Modeling, 4th Ed.2014. ISBN:
978-0262026284.
Additional Articles: see detailed course outline & article
list below.
|
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