Unit 1

Cash Flows and Fixed income securities: Investments and markets – Principal and interest – Present and future values of streams – IRR. Fixed income securities – Market value for future cash – Bond value – Bond details – Yields – Convexity – Duration – Immunization. Bond portfolio management – Level of market interest rates, Term structure of interest-rate theories.

Unit 2

Stocks and Derivatives: Common stock valuation – Present value of cash dividends – Earnings approach – Value versus price – Efficient markets theory – Technical analysis. Analysis of financial statements. Derivatives – futures and options – Black Scholes formula – Utility functions – Applications in financial decision making.

Unit 3

Portfolio analysis and capital market theory: Covariance of returns – Correlation – Portfolio return – Portfolio standard deviation – Two asset case – Efficient frontier – Optimum portfolio. Capital market theory – Capital market line – Sample diversifications to reduce risk – Characteristic line – Capital asset pricing model. Arbitrage price theory – Stock performance evaluation.

Textbook(s)

• David Luenberger, Investment Science. Second Edition, Oxford University Press; 2013
• Jack Clark Francis, Richard W. Taylor. Investments, Schaum’s Outlines, Tata McGraw Hill ;2006.

Reference(s)

• Lyuu YD. Financial Engineering and Computation. Cambridge University Press; 2004.
• Perry H. Beaumont. Financial Engineering Principles. John Wiley and Sons Inc, New Jersey; 2004.

Evaluation Pattern

Objectives

• This course serves as an introduction to financial engineering including cash flows, financial decision making etc
• It gives a thorough yet highly accessible mathematical coverage of standard and recent topics of introductory investments: fixed-income securities, modern portfolio theory, optimal portfolio growth and valuation of multi-period risky investments.

Course Outcomes

• CO1: Apply basic concepts to understand and evaluate cash flows
• CO2: Evaluate and arrive at a financial investment decision employing the underlying knowledge of stocks and derivatives
• CO3: Analyse and design Portfolio selection methods
• CO4: Understand capital market theory for stock performance evaluation

CO – PO Mapping