Undergraduate Students of Applied Mathematics
Course DescriptionFinancial engineering involves the design, development, and implementation of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance.
During the last decade, we have witnessed an increased use of operations research techniques for many diverse aspects of financial engineering.
Operations research tools such as decision analysis, statistical estimation, artificial intelligence (neural nets, fuzzy logic, genetic algorithms), simulation, optimization, stochastic processes and decision support systems are becoming more indispensable in several domains of financial operations.
Many factors have contributed to the growth of financial engineering including (i) technological advances, changing regulations; (ii) globalization of financial markets, increased competition, (iii) ability to solve complex financial models, price volatility.
Financial engineers are involved in many important areas of an organization:
In corporate finance, they develop new instruments or add new feautures to an existing instrument in order to secure the funds necessary for the operation of large-scale businesses.
In securities, they develop innovative trading strategies.
In investments and money management, they develop new investment vehicles such as money market funds, the repo market and mutual funds
In risk management, they identify and measure the risk of different securities and consstruct and maintain portfolios with th specified risk-return characteristics
GoalsThe main goals of this course are
to introduce and explain a range of financial securities and the markets in which they trade,
to provide a conceptual framework of the firm's investment and financing decisions,
to examine of the management of equity and fixed income investments,
to analyse individual securities, the formation of these securities into portfolios,
to use derivative securities to modify the return/risk profiles of more traditional stock and bond portfolios.
PrerequisitesBasic knowledge in analysis and probablity theory.
Student ObligationsStudents will be required to present a case study before the exam.
Course ResourceRobert Fullér, An Introduction to Financial Management,
Course Overview1. Markets and Instruments
The Money Market, Equity Markets, The Fixed-Income Capital Market
2. The International Financial Markets
Purchasing Power Parity, Interest Rate Parity
3. Basic Concepts
Real and Nominal Rates of Interest, Continuous Compounding
4. Portfolio Theory - An Introduction
Risk Attitudes, Portfolios of Two Risky Assets
5. Optimal Risky Portfolios
6. The Capital Asset Pricing Model
Why do all Investors Hold the Market Portfolio?
The Risk Premium on the Market Portfolio
7. Fixed-income securities
Treasury Bonds and Notes, Bond Pricing, Bond Yields
8. Options Markets
The option contract, Rights issues and stock splits
9. Option Strategies
Protective Put, Covered Call, Straddle, Spreads, Collars
10. Option Pricing
Determinant of Option Values, Restrictions on Option Prices
11. Black-Scholes Option Valuation
Put option valuation
12. Futures Markets
Futures Contracts, Hedging and Speculation
The Theory of Comparative Advantage, Interest Rate Swaps
14. The Budapest Stock Exchange: Some Quotations
OTP Bank Ltd., Consolidated Balance Sheet
Recommended literatureZ.Bodie, A.Kane and A.J.Marcus, Investments (Third Edition), Irwin, Times Mirror Higher Education Group, Boston, 1996.
R.A.Brealey and S.C.Myers, Principles of Corporate Finance, (Fourth Edition), McGraw-Hill,1991.
J.C.Hull, Options, Futures and Other Derivative Securities, (Second Edition), Prentice-Hall, 1993.
J.F.Marshall and K.R.Kapner, The Swaps Markets, (Second Edition), Kolb Publishing Corporation, 1993.
R.Pike and B.Neale, Corporate Finance and Investment, Prentice-Hall 1993.