ECON3107 Economics of Finance - 2019

ECON3107
Undergraduate
Term 2
6 Units of Credit
On Campus
Economics
This course outline is for the current semester. To view outlines from other years and/or semesters, visit the archives

1. Course Details

Summary of Course

Valuation of financial assets constitutes a cornerstone of real-world financial markets. The economic theory of financial markets provides a logical foundation for modern asset pricing theory. To understand financial markets and to guide daily financial choices, a comprehensive study of economic theories which underpin them is of critical importance.

This course provides an economic treatment of the finance market. We introduce a micro-founded framework which captures how representative agents make investment decisions under uncertainty, based on which an equilibrium asset price emerges. These ideas are captured by the concept of "arbitrage", and the corresponding concept of an "arbitrage-free environment". Then, a set of frequently used financial instruments, e.g., bonds, stocks, futures and options are introduced, and technologies to value these financial assets are explained with reference to carefully selected real-world examples. The "arbitrage-based" approach of the asset pricing models constitute the pre-midterm (Week 1-4) content of the course.

We then turn to the "utility-based" approach, wherein a well defined utility structure is established as a model primitive. An equilibrium concept is characterised by features of the utility function, e.g., risk attitude and time preference. We then discuss how uncertainty can be dealt with using state-contingent securities, which in turn lead to desirable economic outcomes. We conclude the course with the introduction of CAPM, which captures how equilibrium emerges as a portfolio in such a utility-based environment. This is a cornerstone of the study of finance and economics, for which the Nobel prize committee in 1990 lauded the work of laureate William Sharpe. Essential studies of finance, such as portfolio management, asset pricing, and investment choice are considered as natural extensions and applications of CAPM.

Overall, the tools and knowledge that students acquire in this course are useful and much sought-after in the public and private finance sector.

Teaching Times and Locations

Please note that teaching times and locations are subject to change. Students are strongly advised to refer to the Class Timetable website for the most up-to-date teaching times and locations.

View course timetable

Course Policies & Support

Course Aims and Relationship to Other Courses

​This course is dual-coded ECON3107/ECON5106. It is offered as part of the financial economics major in the BCom and the BEc and in several streams in the Master of Commerce. Successful study of intermediate economic theory is required as a pre-requisite, in the form of ECON 2101 which provides micro-foundations. Intermediate macroeconomics (ECON 2102) may also be useful for students to have studied previously, although it is not required. Completion of of Mathematical Economics (ECON3202) is also recommended but not required. Pre-requisites for students enrolling under the course code ECON5106 are COMM5005 Quantitative Methods for Business plus either COMM5002 Managing Value Creation or ECON5103 Business Economics.

The course establishes a solid foundation for further studies of finance and economics, such as Asset Pricing Theory (FINS5574), Portfolio Management (FINS2624) and Investment Management Modelling (FINS3640).

2. Staff Contact Details

Position Title Name Email Location Phone Consultation Times
Lecturer-in-chargeDrYiyuan XieBUS43693857019Thursday 9:00-12:00 or by appointment
Lecturer    Rajesh LucknauthBUS402N/AThursday 12:00-15:00 or by appointment

Communication with staff

You should feel free to contact your lecturer or tutor about any academic matter. However, we strongly encourage, for efficiency, all enquiries about the subject material be made at lectures or tutorials or during consultation times.

Please always use your UNSW email address for all enquiries and quote your student number.

3. Learning and Teaching Activities

Approach to Learning and Teaching in the Course

​The philosophy underpinning this course and its Teaching and Learning Strategies is based on “Guidelines on Learning that Inform Teaching at UNSW”. Specifically, the lectures, tutorials and assessment have been designed to appropriately challenge students and support the achievement of the desired learning outcomes. A climate of inquiry and dialogue is encouraged between students and teachers and among students (in and out of class). The lecturers and tutors aim to provide meaningful and timely feedback to students to improve learning outcomes.

Learning Activities and Teaching Strategies

The examinable content of the course is defined by the material covered in lectures, tutorials and problem sets.

Lectures

Lectures are central part of the learning activity. They provide a logical structure for the topics that make up the course, emphasize the important concepts and methods of each topic, and provide relevant examples to which the concepts and methods are applied. An interactive environment will be provided during the lectures, where any inquiry/confusion can be raised and answered immediately with face-to-face communication.

Attending lectures is students' essential responsibility. Lectures will not be repeated through email or in consultations. Also, not all topics will be presented extensively in the lectures: students will need to refer to the textbook for further details and to communicate with their peers.

Tutorials

The object of the tutorials is to discuss various approaches to the assigned problem sets and topics covered in the course. Tutorials will contribute to monitoring student progress as well as providing students with feedback on their learning. Students are expected to attempt the tutorial exercises before the tutorials.

Out-of-Class Study

While students may have preferred individual learning strategies, most learning will be achieved outside of class time. Lectures can only provide a structure to assist your study, and tutorial time is limited.

An “ideal” strategy (on which the provision of the course materials is based) might include:

  • Revision of mathematical tools. If you find your knowledge of mathematics is rusty, you might need to practice before your classes start.
  • Reading of the relevant chapter(s) of the text and any readings before the lecture. This will give you a general idea of the topic area.
  • Attendance at lectures. Here the context of the topic in the course and the important elements of the topic are identified. The relevance of the topic will be explained.
  • Attempting the tutorial questions and participating in tutorial discussions.

5. Course Resources

The website for this course is on UNSW Moodle at: http://moodle.telt.unsw.edu.au.

The prescribed text for the course is:

  • William F. Sharpe, “Macro-Investment Analysis”, Stanford University, manuscript.

This book has not yet been published in hard-copy form. It can be downloaded free of charge from William Sharpe's website: http://www.stanford.edu/~wfsharpe/mia/mia.htm.

A more concise, but equally well developed treatment can be found in Sharpe's review article:

  • William F. Sharpe, “Nuclear Financial Economics” in William H. Beaver and George Parker, eds., “Risk Management: Problems & Solutions”, McGraw-Hill, 1995, pp. 17-35.

This is a nice survey article on the pricing of contingent claims that summarises many of the ideas in the first couple of chapters of the textbook. The manuscript can be downloaded from William Sharpe's website: https://web.stanford.edu/~wfsharpe/art/RP1275.pdf.

A more advanced treatment of the relevant topics can be found in Professor Markus K. Brunnermeier's teaching website, courtesy of Princeton University's open-source courses:

Other suggested readings include:

  • Ken Nyholm, “Strategic Asset Allocation in Fixed Income Markets : A Matlab Based User's Guide”, Wiley Finance.

Additional materials such as solutions to the tutorial exercises, MATLAB codes, MATLAB tutorials, etc., will be provided on UNSW Moodle.

The software for the course is MATLAB, which students can download to their personal computers from the UNSW IT website: https://www.it.unsw.edu.au/students/software/matlab.html, available at no cost for non-commercial research and teaching purposes. This software is also installed in the computer labs in the Quad Building and the Mathews Building.

6. Course Evaluation & Development

Feedback is regularly sought from students and continual improvements are made based on this feedback. At the end of this course, you will be asked to complete the myExperience survey, which provides a key source of student evaluative feedback. Your input into this quality enhancement process is extremely valuable in assisting us to meet the needs of our students and provide an effective and enriching learning experience. The results of all surveys are carefully considered and do lead to action towards enhancing educational quality.

​The School of Economics strives to be responsive to student feedback. If you would like more information on how the design of this course and changes made to it over time have taken students’ needs and preferences into account, please contact the Director of Education at the School of Economics.

Student feedback is collected through our daily communication with students, and constructive comments will be addressed immediately within the term in a timely manner. Feedback obtained through myExperience surveys ​ is carefully reviewed every year by teaching staff.  Recent changes in response to student feedback include:

1. The course outline has been revised and the structure of the course redesigned to introduce material in a more progressive, logical, and coherent way. The two utility-based approaches, namely Arrow-Debreu model and CAPM, have been allocated more time in order to provide a more systematic overview of these important topics. More real-world examples are also provided in tutorial questions and assignments.

2. More realistic examples about option pricing have been provided to support the theoretical exposition, and Assignment 2 has been redesigned to incorporate more real world examples;

3. Advanced material has been provided for students who wish to pursue a higher level of understanding and academic achievement;

4. Our friendly teaching staff will provide more comprehensive assistance about course-related issues, including guidance for the group assignment.

7. Course Schedule

Note: for more information on the UNSW academic calendar and key dates including study period, exam, supplementary exam and result release, please visit: https://student.unsw.edu.au/new-calendar-dates
Week Activity Topic Assessment/Other
Week 1: 3 JuneLecture

Matrix operations and Matlab programming; Atomic Security price; Portfolio; Arbitrage Activity, Opportunity Set; Valuation; State-contingent Claims

Week 2: 10 JuneLecture

Interest rate & bond yields; Duration; Forward prices; Expected Return; Risk premium

Tutorial
Week 3: 17 JuneLecture

Option Pricing: American & European Options; Dynamic Strategy; Put-call Parity

Assignment 1 due this week.

Tutorial
Week 4: 24 JuneLecture

Binamial Tree; Hedging; Greek letters;

Blake-Scholes Model

Assignment 1 feedback will be provided this week. Assignment 2 is released this week.

Tutorial
Week 5: 1 JulyExam Week

No lecture topics. Consultation hours are provided on request.

Midterm Exam.

Tutorial
Week 6: 8 JulyLecture

Arrow-Debreu Pricing I: Construction, Definition; Constrained Optimization; Euler Equations

Tutorial
Week 7: 15 JulyLecture

Arrow-Debreu Pricing II: Implications; Incomplete Market and Market Completion;Multiple Commodities, States and Periods

Tutorial
Week 8: 22 JulyLecture

CAPM I: Utility Functions; Certainty Equivalency; Risk Preference; Portfolio Concepts

Tutorial
Week 9: 29 JulyLecture

CAPM II: Risk and Return; Asset Allocation Line; Market Portfolio; Individual Portfolio.

Tutorial
Week 10: 5 AugustConsultation

There is no lecture in Week 10. However, depending on progress and student demand, our teaching staff will provide group consultations. Further information will be available at a closer date, and subject to change.

Assignment 2 due this week. Feedback will be provided before the final exam.

Tutorial

8. Policies and Support

Information about UNSW Business School protocols, University policies, student responsibilities and education quality and support.

Program Learning Outcomes

The Business School places knowledge and capabilities at the core of its curriculum via seven Program Learning Outcomes (PLOs). These PLOs are systematically embedded and developed across the duration of all coursework programs in the Business School.

PLOs embody the knowledge, skills and capabilities that are taught, practised and assessed within each Business School program. They articulate what you should know and be able to do upon successful completion of your degree.

Upon graduation, you should have a high level of specialised business knowledge and capacity for responsible business thinking, underpinned by ethical professional practice. You should be able to harness, manage and communicate business information effectively and work collaboratively with others. You should be an experienced problem-solver and critical thinker, with a global perspective, cultural competence and the potential for innovative leadership.

All UNSW programs and courses are designed to assess the attainment of program and/or course level learning outcomes, as required by the UNSW Assessment Design Procedure. It is important that you become familiar with the Business School PLOs, as they constitute the framework which informs and shapes the components and assessments of the courses within your program of study.

PLO 1: Business knowledge

Students will make informed and effective selection and application of knowledge in a discipline or profession, in the contexts of local and global business.

PLO 2: Problem solving

Students will define and address business problems, and propose effective evidence-based solutions, through the application of rigorous analysis and critical thinking.

PLO 3: Business communication

Students will harness, manage and communicate business information effectively using multiple forms of communication across different channels.

PLO 4: Teamwork

Students will interact and collaborate effectively with others to achieve a common business purpose or fulfil a common business project, and reflect critically on the process and the outcomes.

PLO 5: Responsible business practice

Students will develop and be committed to responsible business thinking and approaches, which are underpinned by ethical professional practice and sustainability considerations.

PLO 6: Global and cultural competence

Students will be aware of business systems in the wider world and actively committed to recognise and respect the cultural norms, beliefs and values of others, and will apply this knowledge to interact, communicate and work effectively in diverse environments.

PLO 7: Leadership development

Students will develop the capacity to take initiative, encourage forward thinking and bring about innovation, while effectively influencing others to achieve desired results.

These PLOs relate to undergraduate and postgraduate coursework programs.  Separate PLOs for honours and postgraduate research programs are included under 'Related Documents'.

Business School course outlines provide detailed information for students on how the course learning outcomes, learning activities, and assessment/s contribute to the development of Program Learning Outcomes.

RELATED DOCUMENTS

 

UNSW Graduate Capabilities

The Business School PLOs also incorporate UNSW graduate capabilities, a set of generic abilities and skills that all students are expected to achieve by graduation. These capabilities articulate the University’s institutional values, as well as future employer expectations.

UNSW Graduate CapabilitiesBusiness School PLOs
Scholars capable of independent and collaborative enquiry, rigorous in their analysis, critique and reflection, and able to innovate by applying their knowledge and skills to the solution of novel as well as routine problems.
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 7: Leadership development

Entrepreneurial leaders capable of initiating and embracing innovation and change, as well as engaging and enabling others to contribute to change
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 6: Global and cultural competence
  • PLO 7: Leadership development

Professionals capable of ethical, self-directed practice and independent lifelong learning
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 5: Responsible business practice

Global citizens who are culturally adept and capable of respecting diversity and acting in a socially just and responsible way.
  • PLO 1: Business knowledge
  • PLO 2: Problem solving
  • PLO 3: Business communication
  • PLO 4: Teamwork
  • PLO 5: Responsible business practice
  • PLO 6: Global and cultural competence

While our programs are designed to provide coverage of all PLOs and graduate capabilities, they also provide you with a great deal of choice and flexibility.  The Business School strongly advises you to choose a range of courses that assist your development against the seven PLOs and four graduate capabilities, and to keep a record of your achievements as part of your portfolio. You can use a portfolio as evidence in employment applications as well as a reference for work or further study. For support with selecting your courses contact the UNSW Business School Student Centre.





Academic Integrity and Plagiarism

Academic Integrity is honest and responsible scholarship. This form of ethical scholarship is highly valued at UNSW. Terms like Academic Integrity, misconduct, referencing, conventions, plagiarism, academic practices, citations and evidence based learning are all considered basic concepts that successful university students understand. Learning how to communicate original ideas, refer sources, work independently, and report results accurately and honestly are skills that you will be able to carry beyond your studies.

The definition of academic misconduct is broad. It covers practices such as cheating, copying and using another person’s work without appropriate acknowledgement. Incidents of academic misconduct may have serious consequences for students.

Plagiarism

UNSW regards plagiarism as a form of academic misconduct. UNSW has very strict rules regarding plagiarism. Plagiarism at UNSW is using the words or ideas of others and passing them off as your own. All Schools in the Business School have a Student Ethics Officer who will investigate incidents of plagiarism and may result in a student’s name being placed on the Plagiarism and Student Misconduct Registers.

Below are examples of plagiarism including self-plagiarism:

Copying: Using the same or very similar words to the original text or idea without acknowledging the source or using quotation marks. This includes copying materials, ideas or concepts from a book, article, report or other written document, presentation, composition, artwork, design, drawing, circuitry, computer program or software, website, internet, other electronic resource, or another person's assignment, without appropriate acknowledgement of authorship.

Inappropriate Paraphrasing: Changing a few words and phrases while mostly retaining the original structure and/or progression of ideas of the original, and information without acknowledgement. This also applies in presentations where someone paraphrases another’s ideas or words without credit and to piecing together quotes and paraphrases into a new whole, without appropriate referencing.

Collusion: Presenting work as independent work when it has been produced in whole or part in collusion with other people. Collusion includes:

  • Students providing their work to another student before the due date, or for the purpose of them plagiarising at any time
  • Paying another person to perform an academic task and passing it off as your own
  • Stealing or acquiring another person’s academic work and copying it
  • Offering to complete another person’s work or seeking payment for completing academic work

Collusion should not be confused with academic collaboration (i.e., shared contribution towards a group task).

Inappropriate Citation: Citing sources which have not been read, without acknowledging the 'secondary' source from which knowledge of them has been obtained.

Self-Plagiarism: ‘Self-plagiarism’ occurs where an author republishes their own previously written work and presents it as new findings without referencing the earlier work, either in its entirety or partially. Self-plagiarism is also referred to as 'recycling', 'duplication', or 'multiple submissions of research findings' without disclosure. In the student context, self-plagiarism includes re-using parts of, or all of, a body of work that has already been submitted for assessment without proper citation.

To see if you understand plagiarism, do this short quiz: https://student.unsw.edu.au/plagiarism-quiz

Cheating

The University also regards cheating as a form of academic misconduct. Cheating is knowingly submitting the work of others as their own and includes contract cheating (work produced by an external agent or third party that is submitted under the pretences of being a student’s original piece of work). Cheating is not acceptable at UNSW.

If you need to revise or clarify any terms associated with academic integrity you should explore the 'Working with Academic Integrity' self-paced lessons available at: https://student.unsw.edu.au/aim.

For UNSW policies, penalties, and information to help you avoid plagiarism see: https://student.unsw.edu.au/plagiarism as well as the guidelines in the online ELISE tutorials for all new UNSW students: http://subjectguides.library.unsw.edu.au/elise. For information on student conduct see: https://student.unsw.edu.au/conduct.

For information on how to acknowledge your sources and reference correctly, see: https://student.unsw.edu.au/referencing. If you are unsure what referencing style to use in this course, you should ask the lecturer in charge.



Student Responsibilities and Conduct

Students are expected to be familiar with and adhere to university policies in relation to class attendance and general conduct and behaviour, including maintaining a safe, respectful environment; and to understand their obligations in relation to workload, assessment and keeping informed.

Information and policies on these topics can be found on the 'Managing your Program' website.

Workload

It is expected that you will spend at least ten to twelve hours per week studying for a course except for Summer Term courses which have a minimum weekly workload of twenty to twenty four hours. This time should be made up of reading, research, working on exercises and problems, online activities and attending classes. In periods where you need to complete assignments or prepare for examinations, the workload may be greater. Over-commitment has been a cause of failure for many students. You should take the required workload into account when planning how to balance study with employment and other activities.

We strongly encourage you to connect with your Moodle course websites in the first week of semester. Local and international research indicates that students who engage early and often with their course website are more likely to pass their course.

View more information on expected workload

Attendance

Your regular and punctual attendance at lectures and seminars or in online learning activities is expected in this course. The Business School reserves the right to refuse final assessment to those students who attend less than 80% of scheduled classes where attendance and participation is required as part of the learning process (e.g., tutorials, flipped classroom sessions, seminars, labs, etc.).

View more information on attendance

General Conduct and Behaviour

You are expected to conduct yourself with consideration and respect for the needs of your fellow students and teaching staff. Conduct which unduly disrupts or interferes with a class, such as ringing or talking on mobile phones, is not acceptable and students may be asked to leave the class.

View more information on student conduct

Health and Safety

UNSW Policy requires each person to work safely and responsibly, in order to avoid personal injury and to protect the safety of others.

View more information on Health and Safety

Keeping Informed

You should take note of all announcements made in lectures, tutorials or on the course web site. From time to time, the University will send important announcements to your university e-mail address without providing you with a paper copy. You will be deemed to have received this information. It is also your responsibility to keep the University informed of all changes to your contact details.




Student Support and Resources

The University and the Business School provide a wide range of support services and resources for students, including:

Business School EQS Consultation Program
The Consultation Program offers academic writing, literacy and numeracy consultations, study skills, exam preparation for Business students. Services include workshops, online resources, individual and group consultations.
Level 1, Room 1035, Quadrangle Building.
BUS.EQS.Consultations@unsw.edu.au
02 9385 4508

Communication Resources
The Business School Communication and Academic Support programs provide online modules, communication workshops and additional online resources to assist you in developing your academic writing.

Business School Student Centre
The Business School Student Centre provides advice and direction on all aspects of admission, enrolment and graduation.
Level 1, Room 1028 in the Quadrangle Building
02 9385 3189

UNSW Learning Centre
The UNSW Learning Centre provides academic skills support services, including workshops and resources, for all UNSW students. See their website for details.
Lower Ground Floor, North Wing Chancellery Building.
learningcentre@unsw.edu.au
02 9385 2060

Educational Support Service
Educational Support Advisors work with all students to promote the development of skills needed to succeed at university, whilst also providing personal support throughout the process. Check their website to request an appointment or to register in the Academic Success Program.
John Goodsell Building, Ground Floor.
advisors@unsw.edu.au
02 9385 4734

Library services and facilities for students
The UNSW Library offers a range of collections, services and facilities both on-campus and online.
Main Library, F21.
02 9385 2650

Moodle eLearning Support
Moodle is the University’s learning management system. You should ensure that you log into Moodle regularly.
externalteltsupport@unsw.edu.au
02 9385 3331

UNSW IT
UNSW IT provides support and services for students such as password access, email services, wireless services and technical support.
UNSW Library Annexe (Ground floor).
itservicecentre@unsw.edu.au
02 9385 1333

Disability Support Services
UNSW Disability Support Services provides assistance to students who are trying to manage the demands of university as well as a health condition, learning disability or who have personal circumstances that are having an impact on their studies. Disability Advisers can arrange to put in place services and educational adjustments to make things more manageable so that students are able to complete their course requirements. To receive educational adjustments for disability support, students must first register with Disability Services.
Ground Floor, John Goodsell Building.
disabilities@unsw.edu.au
02 9385 4734

UNSW Counselling and Psychological Services
Provides support and services if you need help with your personal life, getting your academic life back on track or just want to know how to stay safe, including free, confidential counselling.
Level 2, East Wing, Quadrangle Building.
counselling@unsw.edu.au
02 9385 5418


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ECON3107