Financial Markets; Professor Henrotte

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FINANCIAL MARKETS
Professor: Philippe Henrotte Assistant: Véronique Salat
henrotte@hec.fr salat@hec.fr
Building W2, Rm 21
Ext. 9605

OVERVIEW
This is a core class that offers the basic concepts and tools necessary to understand how financial
markets work, and how financial instruments are used for sound investment decisions.
Topics covered include the following: models of risk and return; time value of money and net
present value; asset allocation and modern portfolio theory; equilibrium asset pricing model;
forwards and futures, options; fixed income securities; equity valuation and market efficiency.
Effort will be made relate the course material to current financial issues and problems relevant to
practitioners.

LEARNING OUTCOMES
When you complete this course, you should be able to understand:
• The basic tradeoff between risk and (expected) return, and how it applies to various types of
financial instruments.
• The time value of money (TVM) and net present value (NPV), and their connection to the discount
rate, cost of capital, or the required risk premium of a financial asset.
• Diversification: how to select a portfolio of securities that maximizes return while minimizing risk.
How does diversification work in practice?
• The main model of asset pricing: the Capital Asset Pricing Model (CAPM). How do we compute the
cost of capital/risk premium?
• Financial instruments: stocks, bonds, and derivatives (futures, options). How are they used for risk
hedging or speculation? How are their prices related to interest rates, volatility, etc.?
• Market efficiency and arbitrage. Are markets efficient, or are they dominated by irrational
investors? Are prices predictable?

KEY TOPICS
Part 1: Finance Fundamentals
Topic 1: Risk and Return
Topic 2: Time Value of Money & Net Present Value
Topic 3: Modern Portfolio Theory
Topic 4: Capital Asset Pricing Model
Part 2: Applications to Financial Markets
Topic 5: Forwards & Futures
Topic 6: Options
Topic 7: Fixed Income Securities
Topic 8: Equity Valuation & Market Efficiency
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COURSE MATERIAL
Recommended Textbook
Bodie, Zvi, Alex Kane, and Alan Marcus (2014). Investments. McGraw-Hill/Irwin, 10th Global Edition.
Required Cases, Assignments, and Other Course Materials
Lecture notes and course materials can be downloaded from Blackboard. Homework assignments and
their solutions are available both on Blackboard and on a dedicated homework web site
(www.henrotte.fr).

TEACHING METHODS
We combine lectures, classroom discussions, readings, homework assignments to strengthen your
understanding of basic topics, and to sharpen your analytic and problem solving skills. The course
presents a thorough conceptual framework for understanding financial markets, yet at the same time
offers much practical knowledge. The course is therefore challenging, and requires a significant
amount of work outside of class in order to get the most out of it.
To contribute successfully to class discussions, you should keep up with the materials covered in class.
Finally, many of you have useful professional experience that can undoubtedly benefit our class
discussions. Do not hesitate to share your experience with the rest of the class!

PREREQUISITES
For this class, you need to have a good understanding of the basic concepts of Statistics. Use of a
spreadsheet package such as Excel will be vital for the assignments, saving time and aiding in
understanding the material.

GRADING
Grades are based on 7 quizzes, 7 homework assignments and a final exam with the following weights
for each component:
Quizzes 25%
Homework Assignments 25%
Final Exam 50%
Each lecture, starting with the second one, starts with a five minute quiz based on the content of the
previous lecture. Quizzes are submitted electronically in class on a dedicated website
(www.henrotte.fr) from a smartphone, a tablet or a laptop computer.
Homework assignments are submitted electronically on the dedicated website (www.henrotte.fr).
You are encouraged to discuss and prepare the assignments in group, but each student should submit
its own solutions on the website before the set deadline.
The exam is closed-book and closed-notes, with a calculator allowed but no other electronic device
(e.g., calculator software on a smart phone is not permitted). You are allowed a "cheat sheet" available
on Blackboard ahead of the exams.

INDIVIDUAL WORK
The homework assignments are designed to help students grasp the details of the lectures. Although
not compulsory, completing the homework is strongly encouraged. Each homework is submitted
electronically through a dedicated secure web site (www.henrotte.fr). Students are encouraged to
discuss the homework assignments in groups but they must submit their answers individually in order
to receive the credits attributed to each correct answer. The web site offers solutions to past
homework assignments, practice training with solutions and a summary of the student’s grades.
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PHILIPPE HENROTTE
Philippe Henrotte is an Affiliate Professor at the Finance Department of HEC Paris. He holds a Master
in Engineering from Ecole Polytechnique Paris, a Master in Finance from Paris Dauphine University
and a Ph.D. in Finance from the Graduate School of Business, Stanford University. He is one of the
founding partners of ITO33, a company which designs sophisticated derivatives pricing software for
financial institutions. He is director of Equinox Russian Opportunity Fund and was CFO of ZAO Eurotek
from 2003 to 2007, an independent gas producer operating in Western Siberia.

SCHEDULE FALL 2018

Class Topic Readings Assignment

Lecture 1 1: Risk and Return Chapter 5 Homework 1
ES1 Mon 1 Oct Due Sun 7 Oct
2: Time Value of Money & Net
ES2 Thu 4 Oct Rates & Returns
Present Value
ES3 Mon 1 Oct
Lecture 2 2: Time Value of Money & Net Chapters 6, 7, 25 Homework 2
ES1 Mon 8 Oct Present Value Due Sun 14 Oct
ES2 Wed 10 Oct Net Present Value
3: Portfolio Theory
ES3 Mon 8 Oct
Lecture 3 3: Portfolio Theory Chapters 8, 9 Homework 3
ES1 Mon 15 Oct Due Sun 21 Oct
4: Capital Asset Pricing Model
ES2 Thu 18 Oct Portfolio Theory
ES3 Tue 16 Oct
Lecture 4 4: Capital Asset Pricing Model Chapter 22 Homework 4
ES1 Mon 22 Oct Due Sun 4 Nov
5: Forwards & Futures
ES2 Thu 25 Oct CAPM
ES3 Wed 24 Oct
Lecture 5 5: Forwards & Futures Chapters 20, 21 Homework 5
ES1 Tue 6 Nov Due Sun 11 Nov
6: Options
ES2 Tue 6 Nov Forwards & Futures
ES3 Mon 5 Nov
Lecture 6 6: Options Chapters 14, 15, 16 Homework 6
ES1 Mon 12 Nov Due Sun 18 Nov
7: Fixed Income Securities
ES2 Thu 15 Nov Options
ES3 Tue 13 Nov
Lecture 7 7: Fixed Income Securities Chapters 18, 11 Homework 7
ES1 Mon 19 Nov Due Sun 25 Nov
8: Equity Valuation & Market
ES2 Thu 22 Nov Fixed Income
Efficiency
ES3 Tue 20 Nov
Lecture 8 8: Equity Valuation & Market
ES1 Mon 26 Nov Efficiency
ES2 Thu 29 Nov
ES3 Tue 27 Nov
Final Support Session Topics 1-8
Fri 7 Dec 13:00 – 14:30
Final Exam Topics 1-8
Mon 10 Dec 10:00 - 13:00