Investments with an IT Focus

Professor Philippe Jorion

GRADUATE SCHOOL OF MANAGEMENT
UNIVERSITY OF CALIFORNIA
IRVINE, CALIFORNIA 92697-3125


Management 209B

This page is still under construction.



I. Course Description

The objective of the course is to present the students with the basic paradigms of modern financial theory, to provide a foundation for analyzing risks in financial markets and study the pricing of financial securities. Topics will include the calculation of risk and return, market efficiency, choice under uncertainty and portfolio theory, asset pricing (CAPM), bonds and term structure, futures and forward contracts, option pricing, and applications of derivatives. Additionally, the IT applications lab will be a fully-integrated component of this class. Concepts will be applied using a variety of computer software.

A new feature of the course will be risk management. The course will discuss why firms should or not hedge financial risks, and methods to control risks. This topic requires a good comparative understanding of various financial instruments.

Risk management is becoming an essential function in financial institutions, serving as a bridge between the front office (trading desk) and back office (trade processing and record keeping). The need for integrated risk management has been brought home by spectacular failures such as those of Barings, Metallgesellschaft, Orange County and Daiwa. Global risk management, however, presents a formidable information technology challenge, since it requires integration of computer systems, common databases and pricing models across front, middle, and back offices.

This course and corresponding IT lab will be team-taught by Professors Philippe Jorion and Eli Talmor.

II. Course Organization

Course Material
Course material includes professor's notes and powerpoint presentations. The texts are:
Robert Haugen, Modern Investment Theory , 4rd Edition, Prentice Hall, 1996,
Philippe Jorion, Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County, Academic Press, 1995
with in addition selected chapters from other texts and journal articles.

Requirements
The same grade will be assigned to the class and associated IT Lab, which count for a 1.5 course. The grade will be based on:

III. Course Outline

Topic
I. Introduction to Financial Markets: Bonds, stocks, derivatives and other instruments
Review of statistics for finance
Reading: Haugen, Chapters 1, 2, 3
Jorion: Big Bets book
Jorion Notes: The Need for Risk Management

II. Portfolio Theory: Diversification, Mean-Variance analysis, factor models
Reading: Haugen, Chapters 4, 5

III. Asset Pricing Models: CAPM Theory, tests, APT, portfolio performance
Reading: Haugen, Chapters 6, 7, 9

IV. Market Efficiency: Theory and evidence
Reading: Haugen, Chapter 23, 24

V. The Term Structure of Interest Rates
Reading: Haugen, Chapter 12, 13
Jorion: Big Bets book, Chapter 8

VI. Bond Portfolio Management: The Treasury market, immunization
Reading: Haugen, Chapter 14, 15
Jorion Notes: Fixed Income Toolkit

VII. Derivatives: Futures, Forwards, and Swaps
Reading: Haugen, Chapter 19
Jorion: Big Bets book, Chapters 5, 6, 7

VIII. Derivatives: Option Contracts
Reading: Haugen, Chapters 16, 18

IX. Financial Engineering: Other classes of contingent claims
Reading: Brealey and Myers, Chapter 22
Finnerty, "Financial Engineering in Corporate Finance: An Overview,"
Financial Management, Winter 1988.

X. Risk Management: The hedging decision, Value-at-Risk
Reading: Institutional Investor, "Getting Risk's Number," February 1995.
Jorion Notes: Measuring Value at Risk
JP Morgan: "Introduction to RiskMetrics"
The Economist, "A Survey of International Banking," April 10, 1993

IV. Course Materials

Materials: To be announced in class

GSM - UC Irvine

Philippe Jorion


© 1997 Philippe Jorion. ALL RIGHTS RESERVED.