FINANCE THEORY
Lecture: Derivatives
SHEN Tao Tsinghua University
Todays Outline
Derivatives in general
Derivatives and 2007 U.S. financial crisis
What is a derivative?
Financial instruments whose value derive from
the value of underlying variables.
t

FINANCE THEORY
Options
SHEN Tao Tsinghua University
Mechanics of Options Markets
Options are different from forward and futures contracts in that an option gives
the right to do something, but does not need to exercise this right.
Forward and future con

FINANCE THEORY
Fixed Income Securities
SHEN Tao Tsinghua University
Outline
Bond Prices and Yields
Term Structure
Interest rate risk
Bond Characteristics
An arrangement: the issuers make specified payments to the
bondholder on specified dates.
par va

FINANCE THEORY
Futures
SHEN Tao Tsinghua University
Future markets
We consider corn futures contracts as an example.
March 5. Investor in New York contacts broker to buy 5000
bushels of corn for delivery in July.
Order is passed to a trader on the floor

FINANCE THEORY
Portfolio Theory
SHEN Tao Tsinghua University
Todays Outline
Review: measuring risk and return
Risk aversion and capital allocation
Optimal risky portfolios
Rates of Return for Different
Holding Periods
effective annual rate (EAR): the

FINANCE THEORY
Lecture: Raising Capital and Capital Structure
SHEN Tao Tsinghua University
Capital Structure
Firm need 50M new funds to undertake its project
Using equity: 15% required return by investor
Using debt: 6%
Debt is better? How does the deb

FINANCE THEORY
Asset Pricing Model
SHEN Tao Tsinghua University
Todays Outline
Single Index Model
CAPM
APT and Multifactor models
Why Index Model?
Two drawbacks of Markowitz procedure
It requires a huge number of estimates
3000 stocks, then 4.5 mill