This course will build on the fundamentals of the theory of finance, and address issues relating to practical investment and finance. These issues will include investment and financing decisions in a certain and uncertain environment, valuation models such as net present value and internal rate of return, capital structure and capital cost, and the Capital Asset Pricing Model.
The course will teach methods and institutional knowledge required to understand how financial decisions will affect the shareholder value of a corporation. The course consists of three parts.
Part A (basic lessons on financial decisions and asset valuation under certainty) elaborates how individuals and their agents make choices among alternatives that have certain payoffs over multiple time periods. The topics include time value of money, the present value principle, project evaluation, fixed income instruments and interest rate risk management.
Part B provides an overview on equity instruments and markets, an introduction to the basic principles of economic valuation under uncertainty and an illustration how those methods apply to equity markets.
Part C deals with derivative contracts. We look at the basic payoff patterns of simple options and of positions consisting of more than one option. We also discuss other financial contracts containing option-like features. Derivative instruments (i.e. options and futures) have widespread applications in risk management, and we discuss the pros and cons of various basic risk management approaches. Furthermore, options and similar cash flow patterns occur in real investments, also, and we show how our valuation framework extends to these applications.
Students are expected to have some basic knowledge in mathematics and statistics. To re-fresh your knowledge, participation of the course "Basics of Financial Mathematics" is recommended.
This course is a pre-requisite for "Corporate Finance" in the summer semester.
The course format includes lectures, in-class assignments and classroom discussions. At the end of each part, there will be a written examination (each 1/3 of final grade) during the semester.
Prof. Dr. Raimond Maurer, Dr. Barbara Kaschützke