Unit 1: Basics on derivatives (Ch. 7.1-7.5)
o Examples of derivatives
o Basics of derivatives pricing
o Binomial valuation
Unit 2: Options, part 1 (Ch. 8.1-8.5)
o Put-call parity
o Binomial pricing of European options
o Binomial pricing of American options
Unit 3: Options, part 2 (Ch. 8.6-8.10)
o Black-Scholes model
o Estimation of volatility
Unit 4: Valuation of risky projects, part 1(Ch. 11.1-11.5)
o Cost of capital as risk-adjusted discount rates using CAPM and APT
o Leverage effects
Unit 5: Valuation of risky projects, part 2 (Ch. 11.6-11.8, Ch.12.1-12.5)
o Certainty equivalent method
o Real options approach
o Understanding economic drivers of project values
After completing the course, students will understand
· the notion of a certainty equivalent and to how use the risk-neutral pricing approach to value of future risky cashflows
· what derivatives are, how basic derivatives work and how they can be priced
· how to value risky projects using risk-adjusted discount rates
· how to value risky projects using the real options approach
· how to analyze the economic drivers behind a risky project’s value
Participation is compulsory in the interactive part. There are grade related performance assessments in each interactive unit. There is absolutely no way to get these points if you are not present for the entire unit.
The course is composed of two parts, a lecture part (5 units) and an interactive part (5 units). The lecture part is organized in only one big class for all students of the specialization. The interactive part is organized in small groups (max. 30 students). The five lecture units take place once a week. The five interactive units also take place once a week, but start one week after the first lecture unit.
The teaching approach of the lecture part is class room teaching type. In the interactive part a mix of methods is applied that includes presentations by the lecturer, class discussions, student presentations of numerical examples (“mini-cases”) and real-life case studies, in-class tests and a final exam.
Based on the introduction to the underlying concepts in the lecture part, students will have to prepare small numerical problems ("mini-cases") for the interactive part. E.g.: The concepts of the first lecture unit are applied and deepened in the first interactive unit, and so on. The mini-cases are either presented by students or evaluated by means of in-class tests and solutions are discussed with the lecturer. In addition, more involved case studies are discussed to provide more insight into industry applications.
The components for the grades are weighted as follows:
- 40% lecture part (final exam)
- 60% interactive part
Interactive part: Students have to prepare mini-cases for the weekly sessions and have to indicate (“check”) the mini-cases they can solve and are ready to present before each session. Each example will either be presented by a randomly selected student who checked this example or will be tested by means of an in-class test for all students. There will be two in-class tests. Students need to check at least 70% of all mini-cases to pass the course. The presentation of mini-cases will be evaluated. In order to pass the course, students need to be able to correctly solve the mini-cases they present. Note that indicating mini-cases you did not solve or cannot explain or present leads to a penalty (for details see Grading below). As many mini-cases can only be solved by using Excel or R students are required to bring their own notebooks to the interactive units to be able to solve in-class tests.
Grading: Formally, the evaluation is based on the total number of credits earned (>50% of credits needed to pass). The total number of credits C will be computed by C = 0.4*Clecture + 0.6*Cinteractive. Clecture denotes the percentage of credits earned at the final exam of the lecture part. Cinteractive denotes the percentage of credits earned for the interactive part and will be computed by Cinteractive = X*0.5*(Test1 + Test2). Testi denotes the percentage of credits earned at in-class test i. X equals one, if at least 70% of all mini-cases have been checked by the student in advance AND all presentations of solutions (if any) have been correct, and zero otherwise. In case that an incorrect solution is presented there will be an opportunity for compensation in the last unit of the interactive part.
The following grading scheme is applied:
|Percentage ||Grade |
|[87.5%;100%]: 1 ||1 |
|[75%;87.5%): 2 ||2 |
|[62.5%;75%): 3 ||3 |
|[50%;62.5%): 4 ||4 |
|<50%: 5 ||5 |
square bracket [ ] = percentage is still included in the quantity
round bracket ( ) = percentage is no longer included in the quantity
Students need to be admitted to the specialization Finance: Markets, Institutions & Instruments to register for the course.
basic knowledge of Excel or R, basics in Statistics