Theory of Finance

Master 2020/2021

Type: Compulsory course (Strategic Corporate Finance)

Area of studies: Finance and Credit

Delivered by: School of Finance

Where: Faculty of Economic Sciences

When: 1 year, 3 module

Mode of studies: distance learning

Instructors: Victoria Rodina

Master’s programme: Strategic Corporate Finance

Language: English

ECTS credits: 3

Contact hours: 40

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Abstract

The course is designed to introduce to students the fundamental issues of financial theory. It is an in-depth study of what the key properties of financial assets are and what techniques for setting fair pricing and detecting arbitrage mispricing have been suggested. The course is rather intense. It involves considering both classic and recent research contributions to the area. In addition to a thorough insight into fundamental theoretical concepts the course covers some issues of related applied research. The course provides essential knowledge and competence at a postgraduate level to those students who intend to follow careers in applied finance, as well as to those students who intend to pursue further research. It would be beneficial for perspective CFA level 1-3 test takers. Ссылка на онлайн-курс:https://oyc.yale.edu/economics/econ-251

Learning Objectives

To improve understanding of basic theoretical concepts and elaborate formal models of financial theory
To familiarize students with various techniques for setting fair pricing and detecting arbitrage mispricing in bond and equity markets
To familiarize students with management of uncertainty of payoffs and strategies of portfolio optimization
To guide students through applications of financial theory in preparation for future independent research

Expected Learning Outcomes

Clearly articulate on key finance issues in valuation of bonds and equities, identify and understand important research contributions to the evolution of financial theory
Distinguish among formal models and critically discuss key facts about them (assessment, implications, uniqueness, debatable aspects, etc.), draw an analytical conclusion based on these key facts
Be familiar with research at the frontier of finance, formulate a research proposal, identify the problem, attach importance and suggest appropriate solution techniques
Possess sufficient knowledge and competence in finance issues to be able to progress to a career in financial industry or to take on an independent research at a PhD level at a university either at home or abroad

Course Contents

Market for discount and coupon bonds
Price risk and default risk; linearity and value additivity; valuation in a single period; and in multiple periods; discount yield and discount price; forward rates; linear and non-linear pricing; coupon effect; duration and convexity
Consistent prices and no-arbitrage in bond markets
Zero-coupon term structure and coupon term structure; discount function; consistent pricing equations; complete coupon bond market model; incomplete coupon bond market model; equivalence theorem; hyperplane separation theorem
Consistent prices and no-arbitrage in state contingent markets
Non-defaultable markets vs state contingent markets; state prices vs date prices; stochastic discount factor model, risk-neutral valuation model; contingent claims valuation model; isomorphism; risk premium within the SDF framework and the risk-neutral framework; price and quantity of risk
Spot rate modelling and discount bond valuation
Log-normal lemma; spot rate dynamic process; SDR dynamic process; Vasicek affine yield model: discrete derivation and critical assessment
Portfolio Theory
Risk aversion and utility function; Jensen’s inequality; absolute and relative risk premium; CARA and CRRA; gambling vs investment; expected utility maximization; monotonic transformation; Mutual fund theorem and Sharpe portfolio separation theorem; portfolio choice with a safe asset and unconstrained optimization; portfolio choice without a safe asset and constrained optimization; minimum variance portfolio and optimal portfolio
Capital Asset Pricing Model
Equilibrium assumption; characteristic line and the beta coefficient; CAPM as a special case of the SDF model; application of CML and SML

Assessment Elements

Non-graded home assignment
Students are expected to prepare home assignments for each tutorial. Home assignments are not graded (except for one home assignment) and provide a self-check option for students. There is no make-up policy for non-graded home assignments.
Graded home assignment
The graded home assignment submitted beyond the deadline is not accepted. A student who fails to submit the graded home assignment and does not have a good excuse will not resubmit it. The null grade will be given. A good excuse means that a student is ill for no less than 50% of the preparation period which starts on the date the graded home assignment is announced and ends on the date the submission deadline is over. A student who fails to submit the graded home assignment and has a good excuse will resubmit another version in due time.
Final test
A student who misses the final test and does not have a good excuse will not resit it. The null grade will be given. If a student misses the final test with a good excuse, we will make it up in due time. A good excuse means that a student is ill on the final test date. If this student misses the final test with a good excuse, we will make it up in due time. A student who fails the course will be re-examined in all topics of the course in due time. The re-examination weight is 100%. The final test is held in a written form on platform Moodle (https://it.hse.ru). The exam will be proctored on platform Examus (https://hse.student.examus.net). Students are advised to access the system 15 minutes prior to the starting time of the final test to make sure that nothing is out of order. Examus provides an opportunity for students to check if their computers / laptops meet technical requirements. To participate in the final test a student must: 1) switch on the camera and the microphone, 2) identify himself / herself by placing an identification document with photo in front of the screen. During the final test students are allowed to use lecture notes and tutorial notes for Theory of Finance and textbooks and articles which are reference for Theory of Finance. Students are allowed to use non-financial calculators. During the final test students are not allowed to contact anyone nearby or online through any means of online communication (i.e. social networks). Students are not allowed to use computers / laptops / cellphones etc. to access internet in an attempt to find answers to questions of the final test. (Examus will record not only the view of the camera but also the view of the screen.) Similarly, students are not allowed to use Excel and the OS-embedded calculator or the calculator in their cellphones. Students are not allowed to talk, to turn right / left / around and to leave. Violations of these rules will be punished by reducing the grade for the final test. If a student is disconnected from the system for more than 5 minutes, the final test for this student is nullified. The final test will be retaken in two possible ways depending on whether the constrains on distance communication are retained or not. If not, the final test will be retaken in a classroom in a written form and in a closed-book format (the use of lecture notes, tutorial notes, textbooks, formula sheets etc. is not allowed). Otherwise, the testing procedure will be similar to the testing procedure for the first final test.

Interim Assessment

Interim assessment (3 module)
0.6 * Final test + 0.4 * Graded home assignment

Course Syllabus