314 Pages
English
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An Outline of Financial Economics

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314 Pages
English

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A systematic treatment of theory and methodology of finance and economics, complete with numerical and applied examples, quantitative problems and questions.


“An Outline of Financial Economics” presents a systematic treatment of theory and methodology of finance and economics. It begins by discussing financial instruments, which form the basis of the theory of finance and are defined as legal documents recording monetary transactions. The text then goes on to analyze bonds – which are regarded as fixed income securities – in a simple framework, and to discuss the valuation of stocks and cash flows in detail.


The text follows an analytical and geometric methodology, explaining technical terms and mathematical operations in nontechnical language. It also provides intuitive explanations of the mathematical results of questions concerning important issues such as risk aversion, uncertainty, prospect theory and the theory of stochastic dominance.


The text also covers two alternative approaches to portfolio analysis – namely the mean-variance and mean-Gini approaches – and features an analysis of the Modigliani–Miller theorem, which has played a major role in the development of business finance. It discusses the capital asset pricing model and the intricacies of the methods for determining prices of different types of options, which give the right to buy or sell an asset. Conditions for non-arbitrage that do not allow advantage of price discrimination between markets are also developed.


Because of its wide coverage and analytical, articulate and authoritative presentation, “An Outline of Financial Economics” will be an indispensable book for finance researchers and undergraduate and graduate students in fields such as economics, finance, econometrics, statistics and mathematics.


Preface; PART I: INTRODUCTION AND BASIC CONCEPTS; 1. Basic Concepts; 2. Intertemporal Decision-Making and Time Value of Money; 3. Risk and Uncertainty; PART II: FIRM VALUATION AND CAPITAL STRUCTURE; 4. Valuation of Stocks; 5. Valuation of Cash Flows and Capital Budget Allocation; 6. Financial Structure of a Firm; PART III: FIXED INCOME SECURITIES AND OPTIONS; 7. Valuation of Bonds and Interest Rates; 8. Markets for Options; 9. Arbitrage and Binomial Model; 10. Brownian Motion and Itō’s Lemma; 11. The Black–Scholes–Merton Model; 12. Exotic Options; 13. Risk-Neutral Valuation and Martingales; PART IV: PORTFOLIO MANAGEMENT THEORY; 14. Portfolio Management: The Mean-Variance Approach; 15. Stochastic Dominance; 16. Portfolio Management: The Mean-Gini Approach; Bibliography; Index

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Published 15 May 2013
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EAN13 9780857285751
Language English
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Exrait

An Outline of Financial Economics
An Outline of Financial Economics
Satya R. Chakravarty
Antem Press An împrînt o Wîmbedon Pubîsîng Company www.anthempress.com
hîs edîtîon Irst pubîsed în UK and USA 2013 by ANTHEM PRESS 75-76 Backrîars Road, London SE1 8HA, UK or PO Box 9779, London SW19 7ZG, UK and 244 Madîson Ave. #116, New York, NY 10016, USA
Copyrîgt © Satya R. Cakravarty2013
he autor asserts te mora rîgt to be îdentîIed as te autor o tîs work. A rîgts reserved. Wîtout îmîtîng te rîgts under copyrîgt reserved above, no part o tîs pubîcatîon may be reproduced, stored or întroduced înto a retrîeva system, or transmîtted, în any orm or by any means (eectronîc, mecanîca, potocopyîng, recordîng or oterwîse), wîtout te prîor wrîtten permîssîon o bot te copyrîgt owner and te above pubîser o tîs book.
British Library Cataloguing-in-Publication Data A cataogue record or tîs book îs avaîabe rom te Brîtîs Lîbrary.
Library of Congress Cataloging-in-Publication Data A cataog record or tîs book as been requested.
ïSBN-13: 978 0 85728 507 2 (Hbk) ïSBN-10: 0 85728 507 6 (Hbk)
hîs tîte îs aso avaîabe as an eBook.
To Ananyo and Sumîta
Contents
Preface
Part I: Introductîon and Basîc Concepts  1. Basîc Concepts  1.1. ïntroductîon  1.2. Fînancîa ïnstîtutîons, Fînancîa Markets and Fînancîa ïnstruments  1.3. Portoîo Management
 2. ïntertempora Decîsîon-Makîng and Tîme Vaue o Money  2.1. ïntroductîon  2.2. Consumer’s Tîme Preerences  2.3. Dîscounted Present Vaue and Fîser’s Proposîtîon
 3. Rîsk and Uncertaînty  3.1. ïntroductîon  3.2. Von Neumann–Morgenstern Utîîty Functîon  3.3. Rîsk Aversîon  3.4. Certaînty Equîvaent  3.5. Mean-Varîance Anaysîs: A Specîa Case o te Expected  Utîîty Approac  3.6. Prospect heory: A Brîe Anaysîs  Appendîx
Part II: Fîrm Valuatîon and Capîtal Structure 4. Vauatîon o Stocks  4.1. ïntroductîon
3 3 3 7
8 8 8 12
16 16 17 22 28 33
36 39
51 51
viii
 4.2.  4.3.  4.4.  4.5.
Contents
Stock Transactîons Vauatîon o Stocks: A Sîmpe Structure Vauatîon o Stocks: A Genera Framework Prîce-to-Earnîngs Ratîo
 5. Vauatîon o Cas Fows and Capîta Budget Aocatîon  5.1. ïntroductîon  5.2. Net Present Vaue  5.3. ïnterna Rate o Return  5.4. BeneIt–Cost Ratîo and ProItabîîty ïndex  5.5. Some Addîtîona ïssues  Appendîx
 6. Fînancîa Structure o a Fîrm  6.1. ïntroductîon  6.2. he Modîgîanî–Mîer heorem  6.3. Dîscussîon
Part III: Fîxed Income Securîtîes and Optîons  7. Vauatîon o Bonds and ïnterest Rates  7.1. ïntroductîon  7.2. Dîscounted Present Vaues and Constant Earnîngs Streams  7.3. Specîa Case o a Bond  7.4. Yîed to Maturîty o Bonds  7.5. Duratîon o Bonds  7.6. Duratîon and Convexîty o a Bond  7.7. ïmmunîzatîon o ïnterest Rate Rîsk  7.8. Forward ïnterest Rate  7.9. Forward Rate Agreement
 8. Markets or Optîons  8.1. ïntroductîon  8.2. Types o Optîons  8.3. Payof Functîons or Optîons  8.4. ProIt Functîons or Optîons  8.5. Boundarîes or Optîon Vaues  8.6. Forward and Futures Contracts
 9. Arbîtrage and Bînomîa Mode  9.1. ïntroductîon  9.2. Condîtîons or Non-arbîtrage: A Sîmpe Mode
52 54 56 58
62 62 64 65 67 68 72
75 75 75 80
87 87 87 88 89 94 97 98 99 101
105 105 106 109 114 117 126
134 134 135
Contents
 9.3. Condîtîons or Non-arbîtrage: A More Genera Mode  9.4. he Bînomîa Mode  Appendîx
10. Brownîan Motîon and ïtō’s Lemma  10.1. ïntroductîon  10.2. Random Wak  10.3. Weîner Process (Brownîan Motîon)  10.4. ïtō’s Lemma  10.5. Appîcatîons  Appendîx
11. he Back–Scoes–Merton Mode  11.1. ïntroductîon  11.2. he Back–Scoes–Merton Partîa Dîferentîa Equatîon  11.3. he Back–Scoes Prîcîng Formuae  11.4. Comparatîve Statîcs: he Greek Letters  11.5. ïmpîed Voatîîty  Appendîx
12. Exotîc Optîons  12.1. ïntroductîon  12.2. Dîgîta Optîons  12.3. Asîan Optîons  12.4. Barrîer Optîons  12.5. Gap Optîons  12.6. Dîscussîon  Appendîx
13. Rîsk-Neutra Vauatîon and Martîngaes  13.1. ïntroductîon  13.2. Martîngae: Background and ïnterpretatîon  13.3. Equîvaent Martîngae Measure: Dîscrete-Tîme Modes  13.4. Equîvaent Martîngae Measure: Contînuous-Tîme Modes  13.5. Equîvaent Martîngae Measure: Contînuous-Tîme Pat and  Stocastîc ïnterest Rate
Part IV: Portfolîo Management heory 14. Portoîo Management: he Mean-Varîance Approac  14.1. ïntroductîon  14.2. Preîmînarîes
ix
138 143 150
154 154 154 156 158 159 162
164 164 164 170 171 175 177
181 181 182 184 186 190 192 194
204 204 205 210 212 213
221 221 222
x
Contents
 14.3. Constructîon o a Portoîo: he Two-Asset Case and a  Dîagrammatîc Exposîtîon  14.4. Constructîon o a Portoîo: he Mutî-Asset Case  14.5. Two-Fund Separatîon heorem  14.6. Capîta Asset Prîcîng Mode  Appendîx
15. Stocastîc Domînance  15.1. ïntroductîon  15.2. Fîrst Order Stocastîc Domînance  15.3. Second Order Stocastîc Domînance  15.4. Lorenz Orderîng, Generaîzed Lorenz Orderîng and  Stocastîc Domînance  15.5. Rankîng Portoîos  Appendîx
16. Portoîo Management: he Mean-Gînî Approac  16.1. ïntroductîon  16.2. Gînî Evauatîon Functîon and Stocastîc Domînance  16.3. Eicîent Set  16.4. Portoîo Anaysîs  16.5. Gînî Capîta Asset Prîcîng Mode  Appendîx
Bibliography Index
224
231 235 236 245
253 253 254 256 259
263 265
272 272 273 276 278 280 282
287 293