FINANCE 898 - Advanced Topics in Finance
This is an advanced course on applied investments topics. It presumes knowledge from the basic course in finance, Global Financial Management, as well as a prior course in Investments. Students must have basic knowledge of options and futures also, so having taken Derivatives and/or Fixed Income is highly recommended. While this course will have topics that are similarly advanced like in my “Global Asset Allocation and Speculative Strategies” course, this Advanced Topics course will be less mathematical (less matrix algebra and derivations) and even more applied and is intended for a potentially broader audience than GAASS. My two elective courses will be designed and coordinated so that crazed finance students may take both courses, if they wish a very strong background in investments applications.
The three major areas that will be examined in this course are: (1) dynamic option creation from continual trading, with applications to mortgages, corporate bonds and index options, (2) risks of hedged and levered portfolios, focusing on basis risks and hedge errors from changing betas and changing correlations, and (3) behavioral finance. There likely will be about three classes on each of these three major topics, with other classes focused on guest speakers and students’ presentations of their own and others’ applied research papers. A few classes may be held jointly with my GAASS class, as the topics overlap. An applied homework assignment will surely be required on each of these areas, which may be done in groups of 1 to 5 persons.
The strategies and fall of Long Term Capital Management in 1998 and the fall of many more “smart money players” in the Financial Panic of 2008-2009 (Bear Stearns, Lehman, Fannie Mae, Freddie Mac, myself and others) are examined in vivid detail. Nonlinearities, skewness and option effects are demonstrated in mortgages and corporate bonds. Challenges of risk management with shifting correlations are explored, as well as the major changes of correlations in extreme markets. The allures and risks of leverage are made clear by examining real cases. Behavioral finance is discussed for its help in understanding the errors made in speculative strategies and for thinking about better methods of risk management, given what we have learned. Some of the ideas of Warren Buffett are also presented and critiqued.
In addition to the homework assignments, a term paper is required. A final examination will be given about ¾ way through the course, not in finals week.