Exam number: 3038
Semester: from 4th semester (Schwerpunktbildung)
Duration of the module: One semester
Form of the module (i.e. obligatory, elective etc.): Elective
Frequency of module offer: Each summer semester
Prerequisites: Fundamentals of Microeconomics, Statistics and Mathematics (analysis und lineare algebra). Grundlagenausbildung should be completed.
Applicability of module for other study programmes:
Obligatory or elective in other study programmes. For further information check regulations of the study programme.
Person responsible for module: Prof. Dr. Karl L. Keiber
Name of the professor: Prof. Dr. Karl L. Keiber
Language of teaching: English
ECTS-Credits (based on the workload): 6
Workload and its composition (self-study, contact time):
Contact time (lecture, tutorials, seminar etc.) 33,75 h; self-study: 146,25 h
Contact hours (per week in semester): 3
Methods and duration of examination:
Successful written exam (120 min)
Emphasis of the grade for the final grade: Please check regulations of the study programme
Aim of the module (expected learning outcomes and competencies to be acquired):
The participants are able to describe the uncertainty in capital markets in discrete time and in some discrete state-space and can optimize some mulit-asset wealth-constrained investment problem. The participants can distinguish type 1 and type 2 arbitrage profiles. The participants are able to check whether the first fundamental theorem of asset pricing (existence of an equivalent martingale measure) and the second fundamental theorem of asset pricing (uniqueness of the equivalent martingale measure) hold true in the capital market. The participants can apply the concept of risk neutral valuation to the pricing of arbitrary payoff profiles (financial engineering). The participants can describe the payoff profiles of financial options, name the determinant factors of option prices, qualify the impact of determinant factors on option prices, and explain value bounds on option prices. The participants can apply the binomial model of option pricing as well as the Black and Scholes model to the pricing of European-type financial options. The participants can analyze a firm’s capital structure from the derivative perspective. The participants can price both equity and debt in the presence of credit risk. The participants are able to explain agency problems (asset substitution, bondholder wealth expropriation, underinvestment) between bondholders and shareholders of corporations from a derivative viewpoint. The participants can distinguish the capital budgeting form the classical perspective (net present value analysis) and the real options approach to capital budgeting. The participants are able to determine the value of managerial flexibility (real options to defer, abandon, expand, and extend projects) in corporate decision making in a binomial option pricing framework. The participants can calculate state-dependent cost of capital of both equity and debt.
Contents of the module:
Arrow-Debreu securities, market securities, discrete payoff space, investment under uncertainty (state-preference theory), arbitrage, risk-neutral valuation, equivalent martingale measure, financial options, put-call parity, Cox, Ross, and Rubinstein binominal option pricing, Black and Scholes option pricing model, corporate securities as options, firm value model of Merton, pricing of credit risk debt, Modigliani and Miller theorem on equity cost of capital, agency problems, definition and types of real options, binomial pricing of real options, cost of equity and cost of credit risky debt.
Teaching and learning methods:
Lecture with tutorials, self-studies
Literature (compulsory reading, recommended literature):
Björk, Tomas, Arbitrage Theory in Continuous Time, 3rd edition, Oxford University Press, 2009. Chaps. 2, 3.
Brealey, Richard A., Stewart C. Myers and Franklin Allen, Principles of Corporate Finance, 9th edition, McGraw-Hill, 2008.
Copeland, Thomas E., Fred J. Weston and Kuldeep Shastri, Financial Theory and Corporate Policy, 4th edition, Pearson Addison-Wesley, 2005.
Ross, Stephen A., Randolph W. Westerfield and Jeffrey F. Jaffe, Corporate Finance, 8th edition, McGraw-Hill, 2006.
Sundaram, Rangarajan K. and Sanjiv R. Das, Derivatives - Principles and Practice, McGraw-Hill, 2011. Chaps. 8-15, 22, 32.
Registration in Moodle Viadrina required.