Foundations of Finance

Foundations of Financial Markets
Course Number C15.0002 , Sections 1, 2, and 3
Stern School of Business, Spring 2006

Syllabus and Course Overview

Professor:

Lasse H. Pedersen
Email: lpederse@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~lpederse/
Office Hours: Wednesday 4:45-6:00 PM in Tisch 429

Teaching Assistants:

Name Office Hours Room Email

Marco Ruiz Monday 4:45 -5:45pm

Tuesday 1 - 3:30pm Mon: outside Tisch 429
or in Tisch 436
Tue: KMC 7-158 marco.ruiz@stern.nyu.edu

Nurian Paz
Tuesday 3:30 - 4:30pm
Thursday 4 - 5pm Both days: KMC 7-158 nqp7361@stern.nyu.edu

Legend:

BKM: Bodie, Kane, and Marcus, "Essentials of Investments" Sixth Edition
RWJ: Ross, Westerfield, and Jordan, "Essentials of Corporate Finance,'' Custom Edition.
:   Key issues, read carefully.
:   Background material, skim. (Exam questions are not directly related to background material.)
:   Graded problem sets. (Listed on due date.)
:   Suggested problems, not graded. (Listed with related topic.)
:   Challenging problems, not graded.

Examples:
Readings: "BKM 1" means all of Chapter 1;
Readings: "BKM 3.8, 5." means Chapter 3 Section 3.8, and all of Chapter 5.
Problems: "BKM 3.6." means Chapter 3, Problem 6.

Lectures: (Last updated: January 10, 2006.)

# Date Topic Readings Problems

01 Jan. 18.
Overview of class.
Financial instruments and why we need them. BKM 1, 2.

02 Jan. 23.

Financial markets. How securities are traded. BKM 3.1-3.7.
BKM 3.8, 21.1-21.3. BKM 3.6.

03 Jan. 25.

Time value of money. FV, PV, annuities, perpetuities.
Core enhancement (C15.0002a) Orientation, Prof. Yuanxing Dong.
RWJ 4, 5.1, 5.2. RWJ 4.8, 4.11,
4.15, 4.16, 4.25, 5.4,
5.10, 5.11, 5.19, 5.33.
Solutions.

04 Jan. 30.

Return measures
Statistics review. RWJ 5.3.
BKM 5.1.
RWJ 5.4. C1
BKM 5.1.

05 Feb. 1.

Risk and expected return.
BKM 5.2-5.3. P01, S01
BKM 5.4, 5.5..

06 Feb. 6.

Portfolio selection with two risky securities. BKM 6.1-6.2. BKM 6.5.

07 Feb. 8.

Portfolio selection with two risky securities, continued. BKM 6.1-6.2. P02, S02
BKM 6.6.
Excel example: portfolio selection

08 Feb. 13.

Portfolio selection with a riskless security.
BKM 5.5, 6.3. BKM 6.7-10.
C2

09 Feb. 15.

Portfolio selection with multiple risky securities. BKM 6.4 P03, S03
BKM 6.13.
Excel example: portfolio optimizer

Feb. 20. Holiday: President's Day

10 Feb. 22.

Equilibrium asset pricing: The Capital Asset Pricing Model. BKM 6.5, 7.1-7.2. P04, S04
BKM 7.3, 7.15.

11 Feb. 27.

Equilibrium asset pricing: The Capital Asset Pricing Model, continued. BKM 7.2-7.3. BKM 7.17-18.

12 Mar. 1.

Equilibrium asset pricing: The Capital Asset Pricing Model, continued. BKM 7.2-7.3. P05, S05
BKM 7.8-12.
Excel example: CAPM

13 Mar. 6.

Review Session. All of the above. Sample midterm

14 Mar. 8.

Midterm.

Mar. 13/15.
Spring Break

15 Mar. 20.

Equity valuation. BKM 12. BKM 12.1, 12.3

16 Mar. 23.

Arbitrage.
Lecture notes.

17 Mar. 27.

Fixed income securities: Prices and yields. BKM 9.1
BKM 9.2-9.3. BKM 9.2.

18 Mar. 29.

Fixed income securities: Prices and yields, continued. BKM 9.3-9.4 P06, S06
BKM 9.4, 9.22.

19 Apr. 3.

Fixed income securities: Yield curve and forward rates. BKM 9.6. BKM 9.30

20 Apr. 5.

Management of interest-rate risk: Duration and immunization. BKM 10.1-10.3.
BKM 10.4. P07, S07
BKM 10.1-4.
Excel example: immunization

21 Apr. 10.

Options basics and strategies. BKM 14.1-14.2.
BKM 14.3-14.4. BKM 14.5,14.25, 14.26.

22 Apr. 12.

Option strategies, continued.
No-arbitrage bounds on options. BKM 14.2. P08, S08

23 Apr. 17.

No-arbitrage bounds on options and the put-call parity. BKM 15.1.
BKM p. 546-549. BKM 15.1, 15.22.

24 Apr. 19.

Binomial Option Pricing. BKM 15.2. P09, S09
BKM 15.27.

25 Apr. 24.

Black-Scholes-Merton Option Pricing. BKM 15.3-15.4. BKM 15.7
Excel example: option

26 Apr. 26.

Market Efficiency. BKM 8. P10, S10
BKM 8.3, 8.17, 8.20.

27 May. 1.

Review Session. All of the above. Sample Final

Exams:
Please check the official NYU website for updates on exam time and room!

Class meeting MW 8:00-9:15 has exam Monday 5/8 8am-9:50am
Class meeting MW 2:00-3:15 has exam Monday 5/8 2pm-3:50pm
Class meeting MW 3:30-4:45 has exam Wednesday 5/3 4pm-5:50pm

All exams are held in the same room as where the class meets
unless otherwise noted.
How to get a good grade

Name	Office Hours	Room	Email
Marco Ruiz	Monday 4:45 -5:45pm Tuesday 1 - 3:30pm	Mon: outside Tisch 429 or in Tisch 436 Tue: KMC 7-158	marco.ruiz@stern.nyu.edu
Nurian Paz	Tuesday 3:30 - 4:30pm Thursday 4 - 5pm	Both days: KMC 7-158	nqp7361@stern.nyu.edu

#	Date	Topic	Readings	Problems
01	Jan. 18.	Overview of class. Financial instruments and why we need them.	BKM 1, 2.
02	Jan. 23.	Financial markets. How securities are traded.	BKM 3.1-3.7. BKM 3.8, 21.1-21.3.	BKM 3.6.
03	Jan. 25.	Time value of money. FV, PV, annuities, perpetuities. Core enhancement (C15.0002a) Orientation, Prof. Yuanxing Dong.	RWJ 4, 5.1, 5.2.	RWJ 4.8, 4.11, 4.15, 4.16, 4.25, 5.4, 5.10, 5.11, 5.19, 5.33. Solutions.
04	Jan. 30.	Return measures Statistics review.	RWJ 5.3. BKM 5.1. RWJ 5.4.	C1 BKM 5.1.
05	Feb. 1.	Risk and expected return.	BKM 5.2-5.3.	P01, S01 BKM 5.4, 5.5..
06	Feb. 6.	Portfolio selection with two risky securities.	BKM 6.1-6.2.	BKM 6.5.
07	Feb. 8.	Portfolio selection with two risky securities, continued.	BKM 6.1-6.2.	P02, S02 BKM 6.6. Excel example: portfolio selection
08	Feb. 13.	Portfolio selection with a riskless security.	BKM 5.5, 6.3.	BKM 6.7-10. C2
09	Feb. 15.	Portfolio selection with multiple risky securities.	BKM 6.4	P03, S03 BKM 6.13. Excel example: portfolio optimizer
	Feb. 20.	Holiday: President's Day
10	Feb. 22.	Equilibrium asset pricing: The Capital Asset Pricing Model.	BKM 6.5, 7.1-7.2.	P04, S04 BKM 7.3, 7.15.
11	Feb. 27.	Equilibrium asset pricing: The Capital Asset Pricing Model, continued.	BKM 7.2-7.3.	BKM 7.17-18.
12	Mar. 1.	Equilibrium asset pricing: The Capital Asset Pricing Model, continued.	BKM 7.2-7.3.	P05, S05 BKM 7.8-12. Excel example: CAPM
13	Mar. 6.	Review Session.	All of the above.	Sample midterm
14	Mar. 8.	Midterm.
	Mar. 13/15.	Spring Break
15	Mar. 20.	Equity valuation.	BKM 12.	BKM 12.1, 12.3
16	Mar. 23.	Arbitrage.	Lecture notes.
17	Mar. 27.	Fixed income securities: Prices and yields.	BKM 9.1 BKM 9.2-9.3.	BKM 9.2.
18	Mar. 29.	Fixed income securities: Prices and yields, continued.	BKM 9.3-9.4	P06, S06 BKM 9.4, 9.22.
19	Apr. 3.	Fixed income securities: Yield curve and forward rates.	BKM 9.6.	BKM 9.30
20	Apr. 5.	Management of interest-rate risk: Duration and immunization.	BKM 10.1-10.3. BKM 10.4.	P07, S07 BKM 10.1-4. Excel example: immunization
21	Apr. 10.	Options basics and strategies.	BKM 14.1-14.2. BKM 14.3-14.4.	BKM 14.5,14.25, 14.26.
22	Apr. 12.	Option strategies, continued. No-arbitrage bounds on options.	BKM 14.2.	P08, S08
23	Apr. 17.	No-arbitrage bounds on options and the put-call parity.	BKM 15.1. BKM p. 546-549.	BKM 15.1, 15.22.
24	Apr. 19.	Binomial Option Pricing.	BKM 15.2.	P09, S09 BKM 15.27.
25	Apr. 24.	Black-Scholes-Merton Option Pricing.	BKM 15.3-15.4.	BKM 15.7 Excel example: option
26	Apr. 26.	Market Efficiency.	BKM 8.	P10, S10 BKM 8.3, 8.17, 8.20.
27	May. 1.	Review Session.	All of the above.	Sample Final
		Exams: Please check the official NYU website for updates on exam time and room! Class meeting MW 8:00-9:15 has exam Monday 5/8 8am-9:50am Class meeting MW 2:00-3:15 has exam Monday 5/8 2pm-3:50pm Class meeting MW 3:30-4:45 has exam Wednesday 5/3 4pm-5:50pm All exams are held in the same room as where the class meets unless otherwise noted.	How to get a good grade