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. 8.7-8.10)

o Properties of option prices

o Real-world applications

Unit 4: Valuation of risky projects, part 1 (Ch. 12.1-12.2)

o Real options approach

Unit 5: Valuation of risky projects, part 2 (Ch. 11.1-11.8, Ch.12.3-12.5)

o Cost of capital as risk-adjusted discount rates using CAPM and APT

o Certainty equivalent method

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. It is not possible to get points for those assessments if you are not present. Note that students may still pass the course if they are absent in the interactive sessions once only. However, students will fail the course if they are absent in the interactive sessions twice or more.

The course is composed of two parts, a lecture part (5 units) and an interactive part (5 units). The lecture part is organized in 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 the traditional class room teaching. In the interactive part a mix of methods is applied that includes student presentations of numerical examples (“mini-cases”), class discussions, presentations by the lecturer and real-life case studies. There will be a final exam which covers the content of the lecture part, the interactive part, as well as the specified textbook chapters.

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. The concepts of the first lecture unit are applied and deepened in the first interactive unit, and so on. The mini-cases are presented by students and solutions are discussed with the lecturer. In addition, more involved case studies are discussed to provide additional insight into industry applications.

The courses are held on campus. The final exam will also be on campus.

Please note the following policy regarding the hybrid mode of this course:
Streaming of the lecture units will only take place if the number of students in the room exceeds the room capacity. Seats in the lecture room are available on a first come  - first serve basis. The interactive classes will never be streamed.

The components for the grades are weighted as follows:

• 40% final exam
• 60% interactive part

Interactive part: Students have to prepare mini-cases for the weekly sessions. Before a specific deadline for each interactive unit, students have to complete an assignment by answering true-false questions that indicate which problems they have solved and by uploading their solutions. Each example will be presented by a randomly selected student who checked this problem. Students need to solve a minimum number of mini-cases to pass the course. The baseline number of mini-cases and the minimum number to pass will be communicated before the start of the interactive part, e.g., a baseline of 27 mini-cases with a minimum of 19 mini-cases to pass. Note, the baseline number serves as a reference, there can be more but never less mini-cases than indicated by this number.

The presentation of mini-cases will be evaluated. Students need to be able to solve the mini-cases they present and explain their reasoning. A negative assessment of a student's presentation reduces the number of checked mini-cases. The precise deduction for such a fail will again be communicated before the start of the interactive part, e.g., a deduction of 6 mini-cases. The same deduction applies if a student indicates mini-cases he/she did not solve.

For example: If a student checks 27 mini-cases overall and fails one presentation, the number of checked mini-cases is reduced to 21. Note that two failed presentations will always lead to a number of checked mini-cases that is below the necessary minimum number and, thus, the student fails the course.

Grading: Formally, the evaluation is based on the percentage of credits earned (minimum of 50% of credits needed to pass). This percentage of credits C will be computed by C = 0.4*C_lecture + 0.6*C_interactive. C_lecture denotes the percentage of credits earned at the final exam (between 0% and 100%). C_interactive denotes the percentage of credits earned for the interactive part. The interactive part credits are calculated by dividing the checked mini-cases (after potential reductions for fails) by the baseline number of mini-cases, e.g., 21 checked mini-cases / 27 = 77.78%. If the checked number of mini-cases is below the minimum number, the resulting credit for the interactive part is 0% and the student fails the course. If the checked number of mini-cases is above the baseline number of mini-cases, the resulting credit for the interactive part is 100%, i.e., C_interactive is capped at 100%.

For example: The student scores 90% in the final exam and 77.78% in the interactive part, then C = 0.4 * 90% + 0.6 * 77.78% = 82.8%.

The following grading scheme based on C is applied:

square bracket [ ] = percentage is still included in the quantity
round bracket ( ) = percentage is no longer included in the quantity

Please note that you will receive a grade for this course as soon as you upload and indicate exercises for an interactive unit.

ctive unit.

Students need to be admitted to the specialization Finance: Markets, Institutions & Instruments to register for the course.

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Basic knowledge of Excel or R, basics in Statistics

rainer.jankowitsch@wu.ac.at