ECO634 Financial Theories [2015]

Aims and Objectives

The aims of this course are; (i) to introduce the fundamental theories in finance, (ii) to introduce the pricing of some financial instrument and (iii) to introduce financial risk management including pricing financial derivatives and instruments. At the end of the course, the students shall (i) acquire the concepts of risk, financial markets and (ii) be able to create models for pricing some selected financial instruments, using R statistical SW.

The content of the course is changing in every year. This year content includes (but not limited):

  • Introduction to Finance and Financial Markets
    • Finance in Economics, Financial System
    • Free Markets and Why Markets fail?
  • Introduction to Mathematics of Finance
  • Interest Rates and Introduction to Bond Math
    • Time Value of Money, Annuity, Perpeuity
    • Bonds and Bonds Valuation
    • Duration, Modified Duration and Convexity of Bond
  • Interest Rate Futures and Forwards
  • SWAPS and SWAPS Valuation
    • Interest Rate SWAPS
    • Currency SWAPS
  • Uncertainty, Risk and Utility Function
    • Taxonomy of Uncertainty and Risk
    • Utility Function
    • Risk Premium
  • Financial Risks - A Taxonomy
  • Options
  • Mechanics of Market
  • Option Strategies
  • Binomial Model for Option Pricing
  • Behaviour of Asset Price Series
  • Black-Scholes Option Pricing
  • Greeks
  • Introduction to Credit Ratings and Credit Risk
  • Credit Ratings and Rating Transition
  • Introduction to Credit Risk Management
  • Numerical Methods and Simulation in Finance

References and Suggested Readings

  • J. C. Hull, Options, Futures and Other Derivatives, Prentice Hall, 2005

  • S. Neftci, An Introduction to the Mathematics of Financial Derivatives, Academic Press, 2000

  • P. Willmott, Derivatives : The Theory and Practice of Financial Engineering (Wiley Frontiers in Finance Series), 1998

  • Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, McGraw-Hill, 2005

  • S. Neftci, Principles of Financial Engineering, Academic Press, 2nd Ed. 2008

First Steps: Installing Necessary SW

To install the main statistical software R, go to web site, click the verson link for your operationg system then download files (for example click Download R for Windows link), then click base and download executable file). I do recommend RStudio as Powerful IDE for R (i.e., editor, viewer and lots of facilitator). Download RStudio Desktop and install it. The next step is to download some packages related with this course (the list of packages may change). You can use the following script to download the packages initially needed.

# Time series Analysis related packages
packagests <- c("foreacast","TSA","timeSeries","xts","xtsExtra","zoo","lubridate","chron", "rugarch","rmgarch","sde","yuima")
packagesdt<-c("WDI","quantmod","countrycodes")
packagesfn<-c("fOptions","PerformanceAnalytics","fPortfolio","YieldCurve")
packagesgr<-c("ggplot2","lattice")
install.packages(c(packagests, packagesdt, packagesgr, packagesfn))

Several useful references about R may be found on internet. However, the following adresses are good starting points: R manual and R Contributed Documentation.In addition, I want to recommend Quick-R and R-bloggers.

Please visit Empirical Finance Task View maintained by Dirk Eddelbuettel for a good collection and summary of packages related with Empirical Finance in R.

Economic-Financial Data Sources

There are several data sources that can be accessed directly within R program. These are;

Please read some introductory pages of eco665 Time Series Course for The First Steps of data creating/cleaning and Exploratory Data Analysis.