FINC6019
Lecture 7
Non-Normality of Returns:
Volatility Modelling
Introduction
Normally distributed returns are the backbone of
many financial models
Modern
portfolio theory
CAPM
Black-Litterman
Black-Scholes
Value
Etc
at risk (VaR)
Why the Normal D
FINC6019 Financial
Modelling
Lecturer: Hamish Malloch
What is financial modelling?
Modern finance has become a very technical and
sophisticated practice.
This often requires the use of advanced
mathematical/computational techniques.
A financial model is a
FINC6019
Lecture 2
Estimating the Cost of Capital
Lecture Outline
What is the WACC?
What
is it used for?
Computing the cost of equity:
Gordon
dividend model
CAPM
Computing the cost of debt
Combining re and rd to obtain WACC
WACC
The WACC (weighted aver
FINC6019
Lecture 9
Log-Normal Distributions and
the Black-Scholes Model
Extending the Binomial Model
Last week we examined the binomial option
pricing model
This used the assumption that the stock price is
governed by a binomial distribution
Extra sophist
FINC6019
Lecture 4
Portfolio Theory I
Introduction
Previously we have been concerned with
problems of corporate finance
Firm
valuation and related concepts
Now we turn to a new field, portfolio theory
This theory is concerned with how to construct
an opt
FINC6019
Lecture 6
The Black-Litterman
Framework
Introduction
In previous lectures we examined modern
portfolio theory as developed by Markowitz
While this theory has enjoyed much academic
success (Nobel prize), it has not found traction
with market pract
FINC6019
Lecture 3
Financial Statement Modelling
Lecture Outline
In the previous lecture we showed how the
WACC is related to the value of a firm
Our focus then was to compute the discount rate
Now our attention turns to determining the free
cash flows of
FINC6019
Lecture 11
Simulation II
Lecture Outline
Last week we examined how to simulate stock
prices by simulating paths of a gBm
In doing this we only modelled the path of a
single asset at a time
We now turn to the problem of modelling several
paths sim
FINC6019
Lecture 8
Options and the Binomial
Pricing Model
Outline
In this lecture we will examine the following
topics
Basics
of options (definitions)
Payoff diagrams
Arbitrage tables
Valuation in the binomial framework for both European
and American
FINC6019
Lecture 10
Simulation I
Lecture Outline
Introduce the concept of computer simulations
Computational method of finding
Random variables within Excel
Construction of gBm paths
Implications of the risk neutral probabilities to
the drift parameter
P
FINC6019
Lecture 12
Review
Exam Details
Date: Wednesday 16th June 2010 at 6:00 pm
2 hours + 10 mins reading time
6 questions of unequal weight (marks alloted for
each question will be provided on the
examination paper)
Topics covered;
Everything
covered
FINC6019
Lecture 5
Portfolio Theory II
Introduction
In the previous lecture we examined how to
compute the set of efficient portfolios
The
only constraint was the budget constraint (sum
of portfolio weights equal to 1)
This means short positions are all