Module Author: E. Richard PercyAuthor Contact: rpercy@capital.eduFunded By: W. M. Keck Foundation
What are options? What purpose do they serve? Can I make money with an additional understanding of options? How can I tell if the price of an option exceeds its true value or understates its worth? This module analyzes the topic of option pricing. Binomial tree models and the Black-Scholes formulae are used to price call options on an underlying asset. . The put-call parity theorem is used to value put options. Background information on options is provided as well as the theoretical implications of the models. Assessment of the models is evaluated through on an investigation of the strengths and shortcomings of the models compared with their empirical performance. The module evaluates the differences between European and American options using mathematical models. In addition, the module examines expansions of the model including adaptation to stocks that pay dividends, the market for foreign exchange, and options on portfolios such as market indices. In assessing the strengths and shortcomings of the models investigated, the existence of alternative models is introduced to allow the interested student pathways to learning after the module.
Module Author: E. Richard PercyAuthor Contact: rpercy@capital.eduFunded By: W. M. Keck Foundation
The first goal for the module is for the student to be able to make financial decisions similar to what a financial manager or an investment manager of a firm would make. To do this the student must learn to analyze cash flows of varied projects, investments, and capital budgets. Among the methodologies employed will be the criteria of Net Present Value (NPV) and Internal Rate of Return (IRR). The concepts of Present Value and Future Value computation will be acquired prior to the Cash Flow analysis. The theory of interest and how it works in the market is explored to better understand its use in Present Value computations. The second portion of this module will emphasize evaluation, generation, and interpretation of the Capital Asset Pricing Model (CAPM). To facilitate financial analysis and valuation of risky assets based on the model it will be necessary to introduce the concept of return-risk analysis and linear regression analysis prior to its application. Students will learn about risk-free assets, forming optimal portfolios given a set of investments. The use of models and real world examples are emphasized with careful attention given to assumptions in models and likely violations of these assumptions in the real world. Significant use is made of mathematical models and techniques. All the mathematics and statistics used is carefully explained with examples in the "just in time" fashion. This should be ideal for the typical student who has had calculus and statistics in the past, but does not remember any of it. The business student who takes this will have plenty of reminders about how to attack these real world problems. The math student will get a background on stocks, bonds, and risk-free investments, so that mathematical concepts can best be applied.
Module Author: Harold GreenAuthor Contact: halgreen@compuserve.comFunded By: W. M. Keck Foundation
A company has a strategy. As part of that strategy, this company wants to enter new markets or expand current markets. While this may done by internal growth, the company feels that internal growth may be risky and expensive. The company, therefore, decides to expand through acquisitions. However, what is the process, how does the company determine what to pay for an acquisition, and what does the company need to know? This module will try to answer some of those questions.