• Black Scholes option pricing model (Hull Chapter 13) - use to value call and put options,
• Capital markets efficiency,
• Wiener processes and Ito's Lemma (Hull Chapter 12) - use to model price change in the future,
• Estimating volatilities and correlations (Hull Chapter 19) - using ARMA, ARCH, GARCH to model price change in the future,
• Regression (lecture slides) - use regression to predict an unknown variable (e.g. stock price),
• review for final examination.

• May 6 Friday - anytime
• May 7 Saturday - before 3pm
• May 9 Monday - 5pm to 8pm (or partial)
• May 16 Monday - 5pm to 8pm (or partial)
• May 17 Tuesday - before 3pm
• May 18 Wednesday - anytime
• May 19 Thursday - before 3pm

• introduction to our course,
• introduction tofinancial markets,
• time value calculation using PV, FV, t, and i,
• calculation of simple and compound interest,
• ordinary annuity and annuity due,
• perpetual cash flow calculation, and
• conversion of APR to EAR for comparison.

• practice questions on time value of money and annuity questions,
• introduction to continuous compounding,
• calculation of continuous compounding present value and future value,
• conversion between continuous and compounding returns,
• introduction to yield curves, and
• theories behind the shapes of the yield curve.

• quiz on interest conversion and time value of money,
• credit risk, credit spread, and its components,
• bond pricing using compounding and continuous interest rates, and
• calculation of yield to maturity.

• yield to maturity, realized yield, current yield, and discount yield,
• introduction to spot / zero rate,
• calculation of spot / zero rates,
• introduction to forward rates,
• CAPM, and
• risk and return calculations.

• correlation with the CAPM framework,
• derivation of the securities market line,
• derivation of the capital market line,
• conclusion of the CAPM model, and
• an introduction of the forward contracts.

• review of what is required for assignment 2 in terms of output and submission process,
• review of forward contracts from last lecture,
• introduction to futures contracts,
• compare and contrast forward and futures contracts,
• introduction to options and their payoff profiles,
• introduction to the binomial tree method of valuation, and
• the use of binomial tree on underlying asset to calculate the value of options.

• review of our topics taught in this course,
• options terminology,
• option profits and loss positions calculations,
• option intrinsic and time value,
• in-the-money, at-the-money, out-of-money options, and
• use of binomial tree model to value American call options.

• using binomial tree to value an European call option, and
• use to Black-Scholes to value options.

• using binomial tree to value an American put option,
• review of topics for mid-term test,
• futures and options profit and loss determination,
• CAPM theoretical, calculation of beta using covariance and variance, and
• interest rate topics on bond valuation, forward rate determination, interest rate conversion between compounding and continuous.

• review of topics covered before the mid-term test,
• outline of remaining topics to cover before the final examination,
• market efficiency hypothesis,
• weak, semi-strong, and strong form efficiency and their implications, and
• markov process, wiener process, generalized wiener process, and ito's lemma.

• regression concepts to calculation of alpha and beta,
• hypothesis testing,
• confidence interval.

• review of regression concepts from last class,
• use and calcuation of standard error,
• hypothesis testing and confidence interval,
• Type I and Type II errors,
• weighted moving average and exponentially weighted moving average model of volatility estimation,
• ARCH and GARCH model of volatility estimation,
• review of option basics,
• review of option risk management strategies covered call and protective put,
• binomial tree valuation of option prices.

Dr. Thomas Wu

Fundamental methods for formulating and solving financial models will be developed. Emphasis will be on defining the mathematical structure of problems.

(a) Knowledge - Basic Financial calculations, Statistical Methods in Finance & Portfolio Optimization, Return Forecasting Models, Regression techniques in Finance & CAPM, Event Studies and Capital Market Anomalies
(b) Skills - Basic financial modeling skills and quantitative methods to solve the financial problems.
(c) Attitude

Fundamentals of Corporate Finance by Ross, Westerfield, Jordan, 8th Edition, McGraw-Hill ('RWJ')

There are two lecture hours and a one tutorial hour per week. Students are required to attend all lectures and tutorials. Students are expected to read the assigned reading materials (or chapters) prior to the lecture and complete their assignments before the tutorials.

In the tutorials, discussions will be based on the topics related to the materials in the preceding lectures and will be in the form of problem discussions.

For this course, a general purpose non-financial calcuator can be used. Students who do not have ready access to a financial calculator should be able to perform all the required analysis and calculations using a general purpose non-financial calculator for the tutorials, assignments, mid-term test, and final examination.

You can also use a non-programmable financial calculator for the tutorials, assignment, mid-term test, and final examination. Common financial calculators are HP12c and TI BAII PLUS. User manual in simplified chinese and a tutorial for the HP12c can be found here and a simple tutorial for the HP12c can be found here. User manual for the TI BAII can be found here.

Regardless of the types of calculators used for this course, students are responsible for their own equipment and they cannot be shared in a quiz, test, or examination situation. As a result, students MUST bring their own calculators to each class. In addition, each student must be proficient in the use of their own equipment.

Electronic translators CANNOT be used for quiz, test, or examination situations, but they can be used during class (only with volume off) and your own study time.

There are specific terms that apply to accounting and finance, and there are various online sources that can help students understand these terms.

Download and print for reference:

• Hong Kong Exchange glossary of terms (English to Chinese)
• 88translation.com finance dictionary (Chinese to English, English to Chinese)

Online finance dictionaries:

• Reuters Chinese to English and English to Chinese finance dictionary
• Goldman Sachs English to Chinese finance dictionary
• Goldman Sachs Chinese to English finance dictionary
• Morgan Stanley English to Chinese finance dictionary

Other unverified sources of financial references:

• Finance Street - a finance related site prepared by the government
• Financial glossary of terms
• List of dictionaries