UNIVERSITY OF CALIFORNIA Econ 136 Course Outline

Department of Economics Spring 2017

Economics 136: Financial Economics

Instructor: Raymond J. Hawkins ([email protected])

This course is an introduction to financial economics. We will cover the theory and
analytical tools used to make investment decisions as well as paradigms of security valuation.
Important themes in the course include risk, return, arbitrage and diversification.
Financial economics is a quantitative subject. Calculus, statistics, and microeconomics
are prerequisites. We will use calculus, statistics and analytical tools developed during
the course. Use of a spreadsheet package like Excel will be important for the homework
assignments.
Requirements
The course requirements are (i) ten graded problem sets, (ii) two midterm exams, and
(iii) a final exam. Some of the problem sets will involve data work. Your course grade will
be determined as follows:
Problem Sets 20%
Midterms 40% (20% each)
Final 40%
The first midterm will be in class on Tuesday, February 21st; the second midterm will
be in class on Tuesday, March 21st. The final exam will be from 7:00 10:00 pm on Friday,
May 12th. The exam location will be announced when it is available.
Meeting Times, GSIs & Discussion Sections, and Office Hours
Class will meet for lectures on Tuesday and Thursday from 3:30 5:00 in 4 LeConte Hall.
In addition, sections will meet once a week for one hour. The GSIs for this course are
Rupal Kamdar ([email protected]). Section 105: Th 6:00 pm 7:00 pm, 251
Dwinelle ; Section 106: Th 7:00 pm 8:00 pm, 102 Latimer.
Byoungchan Lee ([email protected]). Section 101: M 4:00 pm 5:00 pm, 587
Barrows; Section 102: M 5:00 pm 6:00 pm, 587 Barrows.
Molly Van Dop (molly [email protected]). Section 103: W 5:00 pm 6:00 pm, 259
Dwinelle; Section 104: W 6:00 pm 7:00 pm, 259 Dwinelle.
Sections will review background material, amplify & extend concepts introduced in the
lectures, and explain analytical & computational techniques. Your GSI will also hold weekly
office hours. Your first point of contact for questions regarding course material is your GSI.
If the sections or meetings with your GSI do not resolve your questions, you are welcome to
stop by my office (675 Evans) during office hours (Tuesday & Wednesday, 2:00 3:00 pm)
or at other times by appointment.

Spring 2017 Page 1 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

Course Readings

Readings will be assigned from the Course Reader available in both print and eReader
formats at Copy Central on Bancroft Avenue. Other papers may be introduced in
addition to the reader. I will assign readings for each lecture and expect that you will
read the material as the course proceeds.

Later in the course there will be assigned readings from Manias, Panics, and Crashes:
A History of Financial Crises by Charles Kindleberger and Robert Aliber. You will
need the latest edition.

Previous versions of this course used Investments by Bodie, Kane, and Marcus. This
is no longer a required text.

Other works that you may find interesting include:

Continuous-Time Finance by Robert Merton.

Expected Returns: An Investors Guide to Harvesting Market Rewards by Antti Ilma-

nen (available for free download at www.cfapubs.org). This is a condensed version of
his book Expected Returns on Major Asset Classes.

Fixed Income Securities: Tools for Todays Markets by Bruce Tuckman and Angel
Serrat.

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset
by Aswath Damodaran.

Lecture slides will be posted on the bCourses course website.

Spring 2017 Page 2 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

Course Outline:

Introduction, Probability Review, and Introduction to Arbitrage. Overview

and capital structure basics (the unit trust). Probability, Returns, and Risk. Arbitrage
Basics: Covered Interest Parity.

Derivatives The Contingent-Claims (CC) Valuation Paradigm. Forwards,

Futures, and Options. Put-Call Parity, Option Arbitrage, and Synthetic Options.
The Black-Scholes Equation. Implied Volatility, Derivatives Risk Measurement and
Management.

Fixed Income The Discounted Cash Flow (DCF) Valuation Paradigm.

Present Value, Future Value and the Term Structure of Interest Rates. Yield-Curve
Dynamics, Macroeconomics and the FOMC, Funds-Transfer Pricing and Bank Reg-
ulation, and Price-Yield Relationships. Duration, Convexity, Hedging, Floating-Rate
Bonds and The Perfect Hedge. Swaps: Valuation and Uses for Hedging & Funding.

Fixed Income Integrating the CC and DCF Valuation Paradigms. Credit.

Deposit Insurance.

Market Instability and the Financial Crisis. The Subprime Crisis, Keynes &
Minsky.

Portfolios and the Capital Asset Pricing Model. The Dividend-Discount Model
(DDM), and The Capital Asset Pricing Model (CAPM). Diversification and The Cap-
ital Asset Pricing Model. The Arbitrage Pricing Model, and Other Factor Models.

Equities. The DCF Valuation Paradigm: The Gordon Growth Model & 2-Stage
Dividend Discount Model. The CC Valuation Paradigm: The BlackScholes-Merton
& Free Cashflow to the Firm Models.

Behavioral Finance and Course Review.

Spring 2017 Page 3 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

Important Class Policies

1. Attendance is taken in Section during the first two weeks. Failure to attend Section
without an approved absence during this time will result in your being dropped from
the course. Attendance will generally not be taken in class. You need not contact me
or your GSI if you will miss class. There will be no unannounced quizzes. However,
much of the mid-term and final exam material will be based on lectures and
discussions in class.

2. Personal electronics:

Laptops should not be open in class. They are distracting to those around you.
Cell phones should be silenced or in vibrate mode: preferably off.
Texting during the lecture should be kept to an absolute minimum.

3. Email. Your first point of contact for questions regarding course material is your GSI.
I am available to answer questions about course policy and course material. Please put
Econ 136 somewhere in the subject line so your email is routed correctly. I will try
to respond within 48 hours of receiving your email.

4. Calculators. You will need a calculator for Econ 136 exams and your calculator must
be exam legal. Please refer to the following links to see if your calculator is exam
legal. If your calculator is listed it is exam legal. If your calculator is not listed then
it is not exam legal and you will need to buy another one; the following links provide
suggested alternatives.

The University of New South Wales.

The CFA Institute.
The National Council of Examiners for Engineering and Surveying.

The University of New South Wales has vetted a wide range of calculators and has
listed those that can be used for their exams. If you scroll down the page you will find
links to calculators grouped by manufacturer. Drill into the link corresponding to the
manufacturer of your calculator to see if yours is exam legal.
Note: the UNSW link does list some very simple calculators (e.g. four-function calcu-
lators) that, while legal, are not powerful enough for an Econ 136 exam. In addition
to the basic four functions, your calculator needs to be able to do logs, exponentials,
powers and roots (basically everything you need to do much of the homework and the
practice exams).

Spring 2017 Page 4 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

If this is your first time buying a calculator allow me to recommend the Texas In-
struments (TI) 30 series solar calculator. The TI 30 series which I use is a basic
scientific calculator that will server you well in this class and beyond. The solar feature
ensures that the batteries will not run out during an exam.
5. Code of Ethics. You are expected to know the Berkeley Campus Code of Conduct
and to conduct yourself in this class accordingly. In particular, all forms of academic
misconduct including but not limited to cheating, fabrication, plagiarism, or facilitating
academic dishonesty will not be tolerated. Please review the definitions of cheating
posted at The Center for Student Conduct.
Any evidence of cheating will result in a score of zero (0) on that assignment or exam.
Cheating on the final exam will result in an F for the course. Incidences of cheating
will also be reported to Student Judicial Affairs.
6. Honor Code. The student community at UC Berkeley has adopted the following
Honor Code: As a member of the UC Berkeley community, I act with hon-
esty, integrity, and respect for others. The Honor Code, as distinct from the
Student Code of Conduct, is intended to provide a vehicle for campus-wide awareness
and discussion of issues of academic integrity. In the coming months you will notice
mention of the Honor Code in a number of contexts, including student orientation
and signage in classrooms. You can find more information on the Honor Code website
created by the ASUC, complete with FAQs.
7. Problem sets are due no later than the beginning of class on the due date. You must
submit your own work. Copied problem sets will receive a score of zero (0). Graded
problem set will be returned in your discussion sections.
8. DSP exam accommodation. If you are entitled to special accommodation on exams
let me know as soon as possible; preferably no later than the end of the second week
of the semester.
9. Missed Exams. There are no make-up exams. If you miss a midterm you must
contact me before the exam with an excuse that meets University standards.1 Failure to
sit any midterm without having received approval from the instructor before that exam
will result in a zero (0) on that exam. Please take the necessary steps to ensure that
you do not have travel plans that conflict with the final as this will not be considered
an acceptable excuse for missing the final.
1
Religious holidays not recognized by the University must accompanied by a letter from a religious leader.
Schedules for official team events must be provided to me by the end of the second full week of the semester.
For unscheduled official team events (e.g. playoffs) please have your coach contact me. A death in the family
must be documented. Illness or injury should, if possible, be accompanied by a note from a physician or
clinic, on their letterhead.

Spring 2017 Page 5 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

10. Exam regrade requests. Your GSI takes great care in grading exams. If you believe
there was an error in adding up the points on your exam, simply point this out to your
GSI at the end of section when you receive your exam back. If you believe there to be
an error in the grading of your exam, here are the steps you must follow:

(a) Within 7 days of the time that the exams are first returned, give your GSI your
exam and a written (i.e. word processed) request listing the question(s) you think
should be regraded and an explanation of why.
(b) Your GSI reserves the right to regrade your entire exam, not just the question(s)
mentioned in your regrade request. Scores on any question can be changed (in-
creased or decreased). It is possible for you to end up with fewer points at the
end of the regrade than you had originally.
(c) I have advised your GSI to reject any regrade request that is for fewer than 3
points per question.

11. Course Grading. Your course letter grade will be determined solely from the weighted-
average percentage of your graded assignments & exams using a curve. Your final exam
will be held by the economics department for 12 months. Final exams cannot be re-
evaluated once grades are submitted to the Registrars Office. You can look at your
graded exam in 508-1 Evans Hall, generally beginning about 3 weeks after the end of
the semester.

12. P/NP Option. Students taking the course under the P/NP option must earn at least
a C to pass the course.

13. Letters of Recommendation Letters of recommendation are an important part of

your graduate-school application. It is far easier to write a letter for someone I know,
so if you think you might want a letter please come to office hours. Since letters are
often needed some time after the course has ended, when you email me asking for a
letter please include the following information:

(a) a brief bio of yourself so I can personalize the letter.

(b) a copy of the essay(s) you will be including with your application so I can see how
you are pitching yourself to graduate programs and align my letter accordingly.
(c) a reminder of any conversations we had.
(d) a picture.
(e) the pronouns you would like me to use when referring to you in the letter.

14. Fire Alarm Policy An unfortunate phenomenon at UCB is the pulling of fire alarms
by students who labor under the illusion that their entire future rests on a single exam

Spring 2017 Page 6 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

grade. This crime is a felony, punishable by a fine and jail time. Anyone caught
pulling an alarm in the absence of a fire emergency will fail the course and is subject
to expulsion from the University. If there is a fire alarm during an exam, the class
will move outside and finish the exam in the allotted time. In this event, follow the
instructions of the GSIs.
15. Recording of Lectures. You are expected to be familiar with the UC Berkeley policy
regarding Course Note-Taking and Materials and to conduct yourselves accordingly.
In particular, [s]tudents may not make audio or visual recordings of lectures or class
presentations without the advance written consent of the instructor.
Students are not authorized to make a video recording of the lectures.
Students may only make an audio recording of the lectures with my advance
written consent per the University Policy noted above.
Students are to use any recording for their own study purposes only.
Students are not authorized to post any lecture recording to the Internet.

Important Campus Policies and Guidelines

1. ACCOMMODATION OF RELIGIOUS CREED

In compliance with Education code, Section 92640(a), it is the official policy of the Uni-
versity of California at Berkeley to permit any student to undergo a test or examination,
without penalty, at a time when that activity would not violate the students religious
creed, unless administering the examination at an alternative time would impose an
undue hardship that could not reasonably have been avoided. Requests to accommo-
date a students religious creed by scheduling tests or examinations at alternative times
should be submitted directly to the faculty member responsible for administering the
examination by the second week of the semester.
Reasonable common sense, judgment and the pursuit of mutual goodwill should result
in the positive resolution of scheduling conflicts. The regular campus appeals process
applies if a mutually satisfactory arrangement cannot be achieved.
2. CONFLICTS BETWEEN EXTRACURRICULAR ACTIVITIES AND ACADEMIC
REQUIREMENTS
The Academic Senate has established Guidelines Concerning Scheduling Conflicts with
Academic Requirements to address the issue of conflicts that arise between extracur-
ricular activities and academic requirements. They specifically concern the schedules
of student athletes, student musicians, those with out-of-town interviews, and other
students with activities (e.g., classes missed as the result of religious holy days) that
compete with academic obligations. The guidelines assign responsibilities as follows:

Spring 2017 Page 7 of 8

UNIVERSITY OF CALIFORNIA Econ 136 Course Outline
Department of Economics Spring 2017

It is the instructors responsibility to give students a schedule, available on the

syllabus in the first week of instruction, of all class sessions, exams, tests, project
deadlines, field trips, and any other required class activities.
It is the students responsibility to notify the instructor(s) in writing by the second
week of the semester of any potential conflict(s) and to recommend a solution, with
the understanding that an earlier deadline or date of examination may be the most
practicable solution.
It is the students responsibility to inform him/herself about material missed be-
cause of an absence, whether or not he/she has been formally excused.

3. READING, REVIEW, RECITATION (RRR) WEEK

The Reading, Review, Recitation (RRR) period before final exams provides students
time to prepare for exams, to work on papers and projects, and to participate in
optional review sessions and meetings with instructors. For the coming semesters,
please keep these dates in mind:

In Spring 2017, formal classes end on Friday, April 28, 2017. RRR Week will take
place between the last day of classes (April 28) and the first day of the final exam
period (Monday, May 8, 2017).

4. COMMENCEMENT CEREMONIES AND FINAL EXAMS

Campus policy stipulates that graduation ceremonies must take place after the conclu-
sion of final examinations, with the exception of professional school ceremonies with
graduate students only.

Final exams end at 10 pm on Friday, May 12, 2017.

University Commencement will be held Saturday, May 13, 2017.
Department Commencement will be held Sunday, May 14, 2017.

Disclaimer
This syllabus is a living document and subject to revision. Whenever the syllabus is revised
it will be posted to bCourses and an email will be sent to all class participants informing
them of the posting and indicating what has been revised. This version of the syllabus was
generated on January 15, 2017.

Spring 2017 Page 8 of 8