Unit 2510 - Financial Economics

1. Introduction to Financial Economics

1.1 Principles and Concepts

• Definition and scope of financial economics
• Relationship between finance and economics
• Overview of financial markets: primary vs secondary markets
• Role and types of financial institutions

2. Time Value of Money

2.1 Conceptual Understanding

• Explanation of time value of money (TVM)
• Present value (PV) and future value (FV) calculations
• Impact of different interest rates (simple vs compound interest)
• Annuities and perpetuities
• Applications in investment and financing decisions

3. Risk and Return

3.1 Fundamentals

• Defining risk and return
• Measuring risk: variance and standard deviation
• Diversification and portfolio risk reduction
• Risk-return tradeoff and investor preferences

4. Capital Budgeting

4.1 Investment Decision Techniques

• Net Present Value (NPV) method
• Internal Rate of Return (IRR)
• Payback period
• Profitability index
• Comparing and interpreting different capital budgeting outcomes

5. Asset Pricing Models

5.1 Theories and Applications

• Capital Asset Pricing Model (CAPM)
  • Assumptions and formula
  • Beta coefficient and systematic risk
• Arbitrage Pricing Theory (APT)
  • Multifactor model overview
• Comparison of CAPM and APT
• Limitations and practical considerations

6. Market Efficiency

6.1 Efficient Market Hypothesis (EMH)

• Forms of market efficiency: weak, semi-strong, strong
• Implications for investment strategies
• Empirical evidence and challenges
• Anomalies and critiques of EMH

7. Financial Derivatives

7.1 Types and Uses

• Definition and characteristics of derivatives
• Options: call and put options, payoff structures
• Futures and forwards: contract features and settlement
• Swaps: interest rate and currency swaps
• Uses in hedging, speculation, and risk management

8. Corporate Finance

8.1 Financial Decision-Making

• Capital structure theories and considerations
• Dividend policy: types and determinants
• Working capital management: liquidity and operational efficiency
• Corporate governance: principles and impact on firm value

9. Behavioral Finance

9.1 Psychological Influences

• Behavioral biases: overconfidence, loss aversion, herding behavior
• Heuristics in financial decision-making
• Impact of behavioral biases on markets and asset prices
• Behavioral finance vs traditional finance perspectives

10. International Finance

10.1 Global Financial Principles

• Exchange rates and currency markets
• Balance of payments overview
• International capital flows and foreign investment
• Effects of globalization on financial markets and institutions
• Risk management in international finance