Financial Economics, 7.5 Credits

Contents

The course provides an introduction to the field of financial economics with a focus on the open economy. Short- and long-term relationships between money supply, price levels, interest rates, and exchange rates in an open economy are analyzed. The interest rate parity condition and monetary policy in an open economy with fixed and floating exchange rates are discussed. Subsequently, various interest-bearing instruments are examined. Concepts central to the valuation and management of financial assets, such as the fundamental relationship of the money market and the relationship between interest rates and maturities, are covered.

The course also covers stocks and their valuation. In connection with this, the efficient market hypothesis is presented, along with how behavioral economics can influence investors' decisions. Additionally, an introduction to modern portfolio theory is provided, including Markowitz's portfolio selection model and the CAPM model.

Expected learning outcomes

Having completed the course, the student is expected to be able to:

Knowledge and understanding

• Explain the effects of monetary policy in open economies.
• Provide an overview of the development of the global financial system.
• Explain the interest rate parity condition and how currency futures can be used to manage exchange rate risks.
• Explain the fundamental principles of valuing financial assets.
• Explain the basic relationships between returns and risk in financial markets.
• Explain why stock prices are expected to follow a random walk according to the efficient market hypothesis.
• Outline the fundamental principles underlying modern portfolio theory.
• Explain the basic principles behind the Capital Asset Pricing Model (CAPM).

Competence and skills

• Evaluate stocks and interest-bearing instruments.
• Calculate and interpret key concepts related to interest-bearing instruments.
• Use the fundamental relationship of the money market to determine future interest rates and analyze potential arbitrage opportunities.
• Determine forward prices in interest rate and currency futures.
• Apply Markowitz's portfolio selection model to analyze optimal portfolio choices.
• Calculate the risk premium for a financial asset according to CAPM.
• Estimate expected returns for risky assets
• Communicate economic ideas and arguments in English effectively.

Required Knowledge

30 credits in economics and Mathematics 3b/3c or equivalent. Proficiency in English equivalent to the Swedish upper secondary course English 6.

Form of instruction

Learning is supported by lectures and workshops.

Examination modes

The examination consists of an individual written assignment and an individual written hall exam.

The following grading scale will be used for the course: Pass with Distinction (Väl Godkänd, VG), Pass (Godkänd, G) and Fail (Underkänd, U).

The course grade is based on a summary assessment of the results of the included examinations and is set when the module has finished, and all examinations have been assessed. To receive the grade of Pass (G) for the module, it is required that all examinations are passed.

A student who does not pass the first examination will be offered an opportunity to sit a re-examination within two months. An additional examination opportunity is normally offered every academic year, one week prior to the start of the autumn term. If required by specific circumstances, other forms of examination may be used.

A student that has failed an examination on two occasions has a right to have another examiner or grading teacher appointed, unless there are special reasons against it. A written request addressed to the Director of Studies should be made no later than two weeks before the next examination opportunity.

Exceptions from examination form as stated in the syllabus can be made for a student who has a decision on pedagogical support for disabilities. Individual adaptations of the examination form should be considered based on the student's needs. The examination form shall be adapted within the framework of the expected learning outcomes stated in the course syllabus. At the request of the student, the course responsible teacher, in consultation with the examiner, must promptly decide on the adapted examination form. The decision must then be notified to the student.

Academic integrity and cheating

As a student, you are expected to act with academic integrity. This means writing and presenting within the limits of the academic rules and expectations as communicated in the university's regulations and what is otherwise specified by the responsible department.

Disciplinary action may be taken against students who use unauthorized help aids or in some other way try to mislead on a test or on another type of task for examination. Rules and regulations concerning the production of academic texts and correct referencing will be applicable to written assignments. Submitted material may be subject to plagiarism control. In addition, Umeå University rules and regulations for education and research apply.