FRE 6123
Financial Risk Management and
Asset Pricing
Lecture1
Mirela Ivan
mivan@poly.edu
FRE 6123 Fall 2016
1
This class:
Homework 10%
Some questions and some essays responding to articles
Project 10%
Midterm 30%
Final 50%
FRE 6123 Fall 2016
2
How to
Passport Options | GlobalCapital
1 of 4
http:/www.globalcapital.com/article/k64zfltjs9ch/passport-options
COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE
PUBLISHER.
A passport option gives the holder a zero-strike call option on the valu
Copula
If X and Y are independent: Cov(X,Y)=E(XY)-E(X)E(Y)=0
Reverse not necessarily true, unless bivariate normal.
Denote the cumulative distribution function of X ( X 1 , X 2 ,., X n ) by
F(x1 , x 2 , , x n ) P(X1 x1 ,., X n xn )
Multivariate distributi
Risk Latte - Passport Options: Free Lunch or a Unique Product?
http:/www.risklatte.com/Articles/QuantitativeFinance/QF_200.php
Articles
Financial Markets & Trading
Quantitative Finance
History of Finance
Financial and Engineering Mathematics
Economics & B
FRE 6123 Course Outline
Department of Finance and Risk Engineering
NYU Tandon School of Engineering
Fall 20116
Motivation:
- Assets Pricing and Risk management are both fundamental foundations to Financial and
Risk Engineering.
- They require an appreciat
Answers to Suggested-End-of-Chapter Question:
1.
In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders
elect the directors of the corporation, who in turn appoint the firms management. This separation of
ownersh
FRE 6103 Lecture 8
Portfolio theory
Zhaoxia Xu
0
Review of Lecture 7
Portfolio Mathematics
Step 1: calculate expected returns for individual
assets
i E (ri ) Pr( s ) r ( s )
s
Step 2: calculate variances for individual assets
i2 V (ri ) Pr( s ) (r ( s)
Chapter 13
3.
We have the information available to calculate the cost of equity using the CAPM and the dividend
growth model. Using the CAPM, we find:
RE = .05 + 0.85(.08) = .1180 or 11.80%
And using the dividend growth model, the cost of equity is
RE = [
FRE 6103 Lecture 3
Discounted Cash Flow
Valuation
Zhaoxia Xu
0
Objectives
To introduce one of the most important
principles in Finance: the time value of money.
Discounted cash flow valuation
1
Why do we care?
Moving money through time to a common date
FRE 6103 Lecture 9
The Capital Asset Pricing Model
(CAPM)
Zhaoxia Xu
0
Review of Lecture 8
E (rM ) rf
M
E(r)
Slope
M
rf
MV
(r)
If there is a risk free asset, we have the Separation Property
that portfolio choice can be separated into two tasks:
(1) det
FRE 6103 Lecture 10
The Arbitrage Pricing Theory
(APT)
Zhaoxia Xu
0
Lecture outline
Factor Models
Arbitrage Pricing Theory
Comparing CAPM and APT
1
1
Factor models: announcements,
surprises, and expected returns
The return on any security consists of two
FRE 6103 Lecture 4
Net Present Value and
investment decisions
Zhaoxia Xu
0
Outline
Why use Net Present Value?
Alternative rules
The payback period rule
The discounted payback period rule
The internal rate of return
The profitability index
The practice
FRE 6103 Lecture 11
Risk and capital budgeting
Zhaoxia Xu
0
Outline
The Cost of Capital: Some Preliminaries
The Cost of Equity
The Costs of Debt and Preferred Stock
The Weighted Average Cost of Capital
1
1
Whats the Big Idea?
Early, capital budgeting foc
Chapter 4
CQ:
1. Assuming positive cash flows and interest rates, the future value increases and the present value
decreases.
2.
Assuming positive cash flows and interest rates, the present value will fall and the future value will
rise.
3.
The better dea
Chapter 2
CQ:
1.
True. Every asset can be converted to cash at some price. However, when we are referring to a liquid
asset, the added assumption that the asset can be quickly converted to cash at or near market value is
important.
4.
The major difference
Chapter 10
Concept Questions:
3.
No, stocks are riskier. Some investors are highly risk averse, and the extra possible return
doesnt attract them relative to the extra risk.
7.
Yes, the stock prices are currently the same. Below is a diagram that depicts
FRE 6103 Lecture 7
Risk and return
Zhaoxia Xu
0
Outline
Returns
Dollar return and percentage return
Holding period return
Average return and standard deviation of past returns
Risk
Risk premium
Portfolio
Expected portfolio return
Covariance and c
FRE 6103 Lecture 12
Capital Structure
Zhaoxia Xu
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Outline
Capital Structure Question
Financial Leverage and Firm Value
Modigliani and Miller: Proposition I, II (No Taxes)
Modigliani and Miller: Proposition I, II (With
Taxes)
1
1
The Long-Term Financial D
FRE 6103 Lecture 5
Bond valuation Term structure
of interest rates
Zhaoxia Xu
0
Outline
Bonds and Bond Valuation
Zero-Coupon Bonds
Level-Coupon Bonds
Computing Yield-to-Maturity
Government and Corporate Bonds
Term Structure of Interest Rates
1
Bonds
FRE 6103 Lecture 1
Introduction
Zhaoxia Xu
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Finance in the Corporation
Board of Directors
Chairman of the Board and
Chief Executive Officer (CEO)
President and Chief
Operations Officer (COO)
Vice President
Finance (CFO)
Vice President
Marketing
Controlle
Course Info
Lecturer: Ben Hoff
Email: bh94@nyu.edu
Office Hours: by arrangement
Assessment: 2 problem sets at 30% and exam at
70%
1
Lecture Overview
1. Mathematical Concepts
2. Physical, Futures, Forwards
3. Time Structure of Commodity Prices:
Convenience
FIXED INCOME SECURITIES
FRE : 6411
Sassan Alizadeh, Ph.D
Polytechnic Institute of NYU
Fall 2013
1
Bond futures
The Chicago Board of Trade lists futures on the Treasury bonds
on the 30, 10-, five- and two-year Treasury notes. They are
very liquid ,speciall
FIXED INCOME SECURITIES
FRE : 6411
Sassan Alizadeh, Ph.D
Polytechnic Institute of NYU
Fall 2013
1
Replicating Portfolio
If we are able to mimic the cash flow of an asset, with a
portfolio of the primary assets we can then use the nonarbitrage pricing theo
FIXED INCOME SECURITIES
FRE : 6411
Sassan Alizadeh, Ph.D
Polytechnic Institute of NYU
Fall 2013
1
FORWARD AND FUTURE CONTRACT
Forward and Future are contract for a deferred delivery of an
asset at a fix price, agreed upon today.
Forward Contract:
An inve
FIXED INCOME SECURITIES
FRE 6411
Sassan Alizadeh, Ph.D
Polytechnic Institute of NYU
Fall 2013
COURSE OUTLINE
Lecture
Lecture
Lecture
Lecture
Lecture
Lecture
Lecture
1: Introduction: Risk and Volatility of Debt Securities
2: Yield Curve and Term Structure
Metals
Overview
1. Base Metals and Precious Metals Overview
2. The Gold Market
3. Application: Gold as Numeraire - how investors
hedge asset performance into Gold.
4. Taking a look at market design and microstructure on
the LME
5. Overview of Curve shape
FIXED INCOME SECURITIES
FRE : 6411
Sassan Alizadeh, Ph.D
Polytechnic Institute of NYU
Fall 2013
Expectations Hypothesis
Liquidity premium or term Premium
Et ( P (t 1,T )
L ( t ,T )
r (t )
1
P ( t ,T )
It is the excess expected return that a zero-coupon
FIXED INCOME SECURITIES
FRE : 6411
Sassan Alizadeh, Ph.D
Polytechnic Institute of NYU
Fall 2013
Yield Curve
Yield curve is a term used to describe the plot of yield to
maturity against time to maturity or against some other risk
measure such as modified d