INTRODUCTION TO CAPITAL MARKET THEORY
[ICMT - 3 credits]
Term V (2004-2005)
IIM Bangalore
Instructor: Ravi Anshuman
E-mail: anshuman
Phone: X 3104
Office: C/104
Course Philosophy:
There ain’t much philosophy in this course. It’s a hard-nosed down-to-earth quant-kind of course consisting of three modules – fixed income analytics, derivative securities, and portfolio management. [A tentative list of sub-topics is given alongside]
There is no prescribed text book for this course. Lecture notes and supplemental readings will be sufficient. However, you may wish to refer to any standard “investments” text book available in the library. There are numerous books and it can be quite confusing, in my opinion. For greater depth on each topic, I recommend that you try Fabozzi for fixed income analytics and Hull for derivative securities. After considerable deliberation, I have decided not to recommend any specific book for the topic of portfolio management. You can use the class notes, handouts, and journal articles.
Attending all the lectures is an absolute must (from your point of view). Let’s put it this way: If you skip a lecture, the effort you will have to put to catch up with the class is likely to be more than the time spent in class.
Restrictions: Area GPA cutoff, course cap: 35 students
Course evaluation:
Quiz A 15%
Quiz B 15%
Project 20%
FINAL EXAM (portfolio management) 50%
100%
In case you miss a quiz due to documented medical emergency, make-ups will be given at the end of the term. Make-ups will be a combination of oral and written exams.
The following topics will be covered at an introductory level.
Fixed income analytics
Text book reference: Frank J. Fabozzi [Second Edition, Prentice Hall]
Bond Markets, Analysis and Strategies[Chapters 1-4, and 9]
Bond Prices and Yields
Arbitrage Relationships between Whole Bonds and Zeros
The Problem of Interest Rate Risk (Duration and Convexity)
Strategies in bond portfolio management (Immunization)
Term Structure of Interest Rates
Derivative securities
Text book reference: John C. Hull [Second Edition, Prentice Hall]
An Introduction to Futures and Options Markets [Chapters, 7-11]
FRAs Swaps, Futures
The Nature of Options
Option-based trading strategies
Two State (Binomial) Option-Pricing Model
Introduction to forwards, futures, swaps
Valuation of option embedded bonds (interest rate options)
Portfolio management
Money Management Organization based on Portfolio Theory
Generic Portfiolio Problems (Many risky assets and a risk free asset)
Traditional asset pricing theories (CAPM, APT)
Passive and Active Portfolio Strategies (Market timing, stock selection)
Investment styles
Portfolio Performance Measurement