IB235

Finance 1: Financial Markets

Module Overview

Warwick Business School

IB235 Finance 1: Financial Markets

Autumn Term 2014

Module Overview

Module Leader:
Office Hours:
e-Mail:
Seminar Tutors:

Teaching Team:
Dr Tao Li
Friday, 16.00 18.00 (room C2.40, Scarman Rd. building)
Tao.Li@wbs.ac.uk
JunJie Liu (e-Mail: fe10JL@mail.wbs.ac.uk)
Georg Rickmann (e-Mail: phd13GR@mail.wbs.ac.uk)

In this Document
1:
2:
3:
4:
5:
A:
B:
C:

Introduction / Module Objectives

Required / Suggested Textbooks
Module Delivery / Materials
Assessment (Class Test / Final Exam)
Some (hopefully) Useful Advice
Appendix: Module Outline
Appendix: Seminar Rooms / Times
Appendix: Code of Conduct

Page
2
3
5
6
8
9
11
12

PLEASE READ THIS DOCUMENT CAREFULLY!

Why?

This document contains important information about the module. Failure to read
this does not constitute an excuse for missing an event or deadline. Students are
assumed to be fully aware of all information contained herein. As the course
progresses, we will post further information and announcements on my.wbs. You
are expected to check into the IB235 pages on my.wbs on a regular basis.
Module handouts will be provided before the lectures.1 Electronic copies of all
materials will also be made available to download from my.wbs. Out of
consideration for your fellow students, we would ask you to pick up one pack per
person only. An electronic version of the pack will also be available to download
from my.wbs. Further materials will be made available (electronically and/or in
print) throughout the term.

Materials for Weeks 2-4 will be handed out before Week 2s lectures, materials for Weeks 5-8 will
be handed out before Week 5s lectures, and materials for Week 9 will be handed out before Week
9s lectures.

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IB235

Finance 1: Financial Markets

Module Overview

1: Introduction
Background:

Finance 1 (IB235) is a core module for all students in the second year of the WBS
BSc Accounting and Finance programme, and an elective module for students in
other WBS undergraduate courses. IB114 Financial Management (a core UG1
module for BSc AFIN) or IB125 Foundations of Financial Management (a core UG1
module for BSc MAN, BSc INTL MAN and BSc INTL BUS, and a UG1 elective for BA
LAW & BUS) are pre-requisites for IB235 Finance 1. Conversely, IB235 Finance 1 is
a pre-requisite for IB236 Finance 2 which runs in the Spring term.

Objectives:

The objective of this module is to provide a rigorous, in-depth introduction to the

workings of modern financial markets. There are many different players using
these markets. On the one hand, corporations, governments, and other
institutions use the financial markets to raise funds (i.e. borrow money) for
capital investments. On the other hand, these funds are provided by private and
institutional investors (by buying securities issued by corporations, or depositing
money with banks, etc.) Banks and other financial institutions (e.g. pension or
mutual funds, etc.) act as intermediaries between investors and borrowers.
While Finance 2 (IB236) deals mainly with the corporate angle (Corporate
Finance), this module (Finance 1, Financial Markets) focuses primarily on the
investors perspective. We define and discuss the characteristics of different
financial securities, including money market instruments, equity, corporate and
government bonds, as well as selected classes of derivative securities (futures,
options, etc.).
We examine the mechanics of the markets on which these instruments are
traded, discuss their uses, and develop tools to analyse their values, and the risks
associated with them. We introduce measures to quantify the risk-and-return
characteristics of different financial assets or portfolios, and develop tools that
allow investors to make optimal investment decisions based on these measures.
A detailed list of the topics covered in this module, as well as any required or
supplementary reading, is given in Appendix A of this document.

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IB235

Finance 1: Financial Markets

Module Overview

2: Reading
The core textbook for this module is:
HRWJJ:

Hillier, D., Ross, S.A., R.W. Westerfield, J.F. Jaffe, and B.D. Jordan:
Corporate Finance (2nd European Ed., 2013)
McGraw-Hill (Higher Education); ISBN-13 9780077139148
The publisher price is 61.99 but the Bookshop will sell the book at 56.99.
Students are required to read the assigned chapter(s) (as indicated in the detailed
outline in Appendix A, and also on the first page of each set of lecture notes)
before attending class. The main textbook was chosen as the best compromise,
so that students would not have to purchase two different books for Finance 1
and 2. Some of the topics covered may be dealt with in more detail (or from a
different angle) in other textbooks. The following is an (incomplete) list of further
(optional) reading you might find useful:

S:

Steiner, R.:
Mastering Financial Calculations
FT Pearson Education
Useful as back-up for the financial calculations used in the course.

CWS:

Copeland ,T.E., J.F. Weston , and K. Shastri,:

Financial Theory and Corporate Policy (4th Edition.,2004)
Addison Wesley.
Excellent for Week 3 investor preferences.

BKM:

Bodie, Z, A. Kane, A.J. Marcus:

Investments and Portfolio Management (Global Ed., 2011)
McGraw-Hill/Irwin
This book focuses exclusively on the investors (instead of corporate) perspective.

BMA:

Brealey, R.A., S.C. Myers, and F. Allen:

Principles of Corporate Finance (Global Ed., 2011)
McGraw-Hill/Irwin
This book is similar to HRWJJ, focusing on the corporate angle.

H:

Hull, J.C.:
Options, Futures, and Other Derivatives (8th Ed., 2012)
Pearson Education
As the name suggests, this is a book about derivatives.
There are also reduced versions of some of the books listed above, typically
called something like Essentials of or Fundamentals of . These cover the
same topics in less depth and breadth, but might still be helpful in some cases.
And finally, for some topics a book on micro-economic theory might be useful.

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IB235

Finance 1: Financial Markets

Module Overview

There are many other books, and different authors have different styles of
presenting the materials. If you are looking for additional reading, it might be a
good idea to spend some time in the library or a good bookshop (or on the web),
browse through some titles and try to find one (or more) that suit(s) you.
Additional reading materials (e.g. articles, notes on specific topics, etc.) will be
made available (via my.wbs) as the course progresses.

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IB235

Finance 1: Financial Markets

Module Overview

3: Delivery
Lectures:

There will be two hours of lectures each week:

Thursday,

Seminars:

18.00 20:00, in Room R0.21 (Ramphal Building)

In addition to the lectures, you are required2 to attend one seminar (tutorial)
session per week. Seminars start in Week 3. A preliminary list of times and
rooms is given in Appendix B of this document; additional information will be
made available in class at the beginning of the module. Once term has started,
check my.wbs to find which seminar group you are assigned to. Because of
limited room capacity, and to ensure accurate attendance record keeping, it is
important that you attend your allocated group.
The purpose of the seminars is two-fold: first, for each week of the module there
is a set of problems / exercises (included in your handout pack, see below, and
also posted on my.wbs) relating to the material covered in that week. You are
expected to make the best effort to solve these problems (in your spare time; you
are encouraged to work in groups), and the solutions will be discussed in the
following weeks seminar. Please note that solutions will be discussed only if it is
evident that students have made a bona-fide attempt3 to solve the problems.
Second, the seminars serve as a platform for discussion and clarifying questions
about the course materials. Because of the large class size, your seminar tutor
will be your first point of contact if you have questions about the module content.

Materials:

Module handouts (including copies of the lecture slides, problem sets for the
seminars, etc.) will be provided before the lectures.4 Electronic copies of all
materials will also be made available to download from my.wbs. Because of the
large class size, there will be few spare handout packs. Out of consideration for
your fellow students, we would ask you to pick up one pack per person only.
Solutions to the seminar problems will be handed out by the seminar tutors at
the end of each seminar session. Please note that no spare solutions will be
made available throughout the term, the only way to obtain copies of the
solution notes is to attend the seminars. However, a complete set of solution
notes will be posted in electronic form on my.wbs at the end of term.

In accordance with University regulations, attendance records will be kept for all seminar sessions.
Failure to attend two or more consecutive seminars will be reported to the University and the
students personal tutor.
We do not expect perfect solutions from all students at all times. However, to facilitate a
meaningful and effective discussion, we do expect everyone to have read the problems and have
made a genuine attempt at solving them.
Materials for Weeks 2-4 will be handed out before Week 2s lectures, materials for Weeks 5-8 will
be handed out before Week 5s lectures, and materials for Week 9 will be handed out before Week
9s lectures.

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IB235

Finance 1: Financial Markets

Module Overview

4: Assessment
Assessment for this module is based on two components:
Term Test:

A 45-minute term test which will take place during the lecture session on the
Thursday evening of the last week of the Autumn term (4 December 2014). This
test will contain 10 multiple choice questions, all of which are equally weighted.
The test counts for 20% towards your overall grade on the module.

Final Exam:

In addition, there will be a 90-minute written examination, held in May or June

2015, counting for the remaining 80% of your grade. Details about the format
and exact date of the exam will be provided at a later stage. In the meantime,
you may want to have a look at the sample exam paper included in the pack.

IMPORTANT!
Warning:

You are required to attend both the class test and the final exam.
Make sure to arrange your travel plans accordingly!
Failure to attend without valid reason will result in a mark of zero!
If you must miss either test or exam for, say, medical or other reasons beyond
your control, inform both the programme team as well as your personal tutor as
early as possible. Provide evidence (e.g. doctors note) if at all possible!

Copies of last years (2013/14) term test and final exam paper (including solution
notes) are included in your handout pack for reference.

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IB235

Finance 1: Financial Markets

Module Overview

Frequently Asked Questions

Q:

How is my final module mark determined?

A:

Test and exam are marked independently by two internal (WBS) examiners, and
marks are moderated between these. The external examiner (a subject specialist
from another university) checks appropriateness of the assessment process and
confirms (or moderates where necessary) the marks. An overall module mark is
calculated as weighted average of test and exam. Final marks are confirmed by
the exam board (which meets in the summer of 2015, after the exam period).

Q:

What happens if I miss the test?

A:

If you miss the December term test due to valid5 (e.g. medical or similar) reasons,
the Summer exam mark (if available) is re-weighted to count for 100% of the
module mark. In all other cases (unexplained test absence), a mark of zero is
recorded for the test!

Q:

What happens if I miss the summer exam?

A:

If you miss the summer exam due to valid (see footnote4) reasons, you will be
given the chance to sit a (similar but of course not identical) exam as first
attempt in September. If a class test mark is available, this will be carried
forward. Unexplained absence from the exam results in a mark of zero!

Q:

What happens if I fail the module?

A:

If you fail the module (i.e. achieve a module mark < 40), you may be required to
re-sit the exam in September. The exam paper will be the same as that for
first attempts (see above). Note that for re-sits (unlike first attempts), the
mark that will be recorded on your transcript (and is thus used to compute your
overall grade average for the year) is capped at a maximum of 40.

Q:

Ive heard (from previous cohorts?) that Finance 1 is really tough. Is that true?

A:

Yes and no. The material is challenging, and it has to be to make it worth the ink
on your transcript. When you have completed this module, employers out there
expect you to possess certain skills and knowledge, and it is our task (when I say
our, that includes the students: it must be a joint effort ) to ensure that these
expectations are met. We give you all you need to succeed in this course, and we
are all here to help if you have questions. If you put in the effort (see also Section
5 below), you can (and probably will) do well on this course. We typically end up
with an average mark of about 60%, more than 40% of students achieving a II.1
grade or better, more than 15% a first, and less than 4% fails. Not at all bad if
you ask me. So, the conclusion is: yes it is tough, we do not give top grades away
for free. But it is fair and if you work hard you will succeed!

What constitutes a valid reason for absence from an examination is determined by the exam
board in accordance with the Universitys and the Schools rules and regulations, based on any
evidence provided (where available).

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IB235

Finance 1: Financial Markets

Module Overview

5: Some (Hopefully) Useful Advice

Finance is not a spectator sport! Throughout this course, we will discuss some
rather complex topics, many of which involve some level of mathematics. Just
listening to the lectures and reading the textbook will not be enough to achieve
mastery of the concepts covered. To put it differently, it is impossible to learn
how to ride a bicycle simply by watching someone else do it; only doing it
yourself (which includes falling off a few times, dusting yourself off and trying
again) will make you proficient. In other words, to succeed in this module you
will need to practice (practice, practice, ), applying what youve learned in the
lectures to concrete problems. So, my advice is:
Make sure to keep on top of the material at all times; do not wait until one week
before the exam (by which time it will be too late). Revise what youve learned
every week, identify any gaps in your understanding, and try to fix such gaps.
If anything is unclear, do not hesitate to ask. We (lecturer and seminar tutors)
are here to help. However stupid you think your question is, it is likely that
many people in the class had the same question but didnt dare to ask
On the other hand, use the available resources efficiently. It may sometimes
seem easier to ask the lecturer instead of consulting the notes or the textbook,
but this may waste valuable lecture time that could be used more effectively.
Use the seminar problem sets for practice and self-assessment. Make your best
effort to solve the problems before attending the seminar; do not wait until you
are given the solutions. Doing it yourself is the best way of learning.
Exploit the diversity in skills of the student cohort. Work in groups, share your
insights with others and be prepared to learn from them. You do not compete
with one-another, your only common enemy is the contents of the course.
Finally, make sure to check into my.wbs on a regular basis. We will post any
additional reading materials, announcements about the course, and any other
important information either in the resources section or the messages
section. We will also try to maintain a discussion board on which you can discuss
both administrative as well as academic issues related to the module.
*
We hope youll enjoy the course!
Good Luck!

Your Finance 1 team.

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IB235

Finance 1: Financial Markets

Module Overview

A: Module Outline
Note:

This outline is preliminary and may be subject to minor changes. Such changes (if
any) will be announced in class and also via messages on my.wbs.

Week 1:

No Lectures

Week 2:

Introduction and Foundations

Introduction to Financial Markets
Basics of Financial Calculus Present / Future Value
Markets and Instruments Money / Capital Markets
Mechanics of Trading Bid / Ask Spread, Short Selling

Reading:

Week 3:

Reading:

Week 4:

Reading:

Week 5:

Reading:

Core:
Additional:

HRWJJ Chapter 4, Section 1.3

S
Chapters 1 & 2
BKM Chapters 2 & 3

Investor Preferences
Decision-Making under Uncertainty Utility Functions
Risk Aversion and Risk Premium
Inter-Temporal Investment / Consumption
Core:
Additional

CWS Chapters 1 and 3

HRWJJ Chapter 6

Risk and Return

Foundations Expected Return, Variance, Correlation
Return and Risk Historic Perspective
Efficient Markets Hypothesis Random Walk Model
Core:
Additional:

HRWJJ Chapters 9 & 13

BKM Chapters 5 & 11

Portfolio Theory
Diversification Efficient Frontier, Systematic / Idiosyncratic Risk
Optimal Asset Allocation Without Risk-Free Asset
Capital Allocation Sharpe Ratio, Tangency Portfolio
Core:
Additional:

HRWJJ Sections 10.1 10.7

BKM Chapters 6 & 7

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IB235

A:

Week 6:

Reading:

Week 7:

Reading:

Week 8:

Reading:

Week 9:

Week 10:

Finance 1: Financial Markets

Module Overview

Module Outline (Contd)

Asset Pricing and Mergers & Acquisitions

Capital Asset Pricing Model Alpha, Beta
Applications and Empirical Evidence
M&A Defence The White Knight Rises by expert guest David Krap
Core:
Additional:

HRWJJ Sections 10.8, 10.9

BKM Chapter 9

Security Valuation
Bond Valuation Yield-to-Maturity, Duration, Convexity
Stock Valuation Cost of Capital, Dividend Discount Model
Value and Growth ROE, PVGA, P/E Ratio
Core:
Additional:

HRWJJ Chapter 5, & Section 25.6

S
Chapter 6
BKM Chapters 14, 16 & 22

Introduction to Derivatives
Futures and Forwards Hedging, Pricing
Options Contract Specifications, Pay-Off Profiles
Determinants of Option Value The Greeks
Core:
Additional:

HRWJJ
BKM
H
S

Sections 25.1 25.5, 25.7, & 22.1 22.7..22.9

Chapters 25 & 20
Chapters 2, 3, 5, 8, & 9
Chapter 9

A Prediction Game and Module Review

A prediction game [time permitting]
Module Review
Solving problems selected from the sample exam paper

CLASS TEST (Thursday, 4 December 2014)

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IB235

Finance 1: Financial Markets

Module Overview

B: Seminar Times and Rooms

All seminars will take place on Thursdays, starting in Week 3 and finishing in
Week 9. The seminar in any given week is devoted to discussing the problem set
that relates to the material covered in the preceding week (e.g. Problem Set #2
relates to the lectures of Week 2; the solutions to this problem set will be
discussed in the seminars of Week 3). Below is a (preliminary) list of available
seminar times and rooms.

#
1
2
3
4
5
6
7
8
9
10
11
12

Time
09:00 10:00
11:00 12:00
12:00 13:00
14:00 15:00
16:00 17:00
17:00 18:00

Room
H0.03
H3.44
H0.03
S0.09
H3.44
S0.28
H0.03
H0.43
S0.19
S0.20
C1.11/15
S0.08

(Building)
(Humanities)
(Humanities)
(Humanities)
(Social Studies)
(Humanities)
(Social Studies)
(Humanities)
(Humanities)
(Social Studies)
(Social Studies)
(Social Studies)
(Social Studies)

Tutor6
G
J
G
J
G
J
G
J
G
J
G
J

Please note that the above list is preliminary; minor changes are possible based
on final enrolment numbers and availability of seminar tutors. The allocation of
students to seminar groups will be coordinated by the Undergraduate Office.
More information will be provided in the first lecture (Thursday, 9 October 2014),
and also via my.wbs.

In the table, G stands for Georg Rickmann, and J for Junjie Liu.

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IB235

Finance 1: Financial Markets

Module Overview

C: Code of Conduct
Finance 1 is a very large class. To make things work for both students and
teachers, it is important that we lay down some ground rules of acceptable
conduct. The teaching staff will make their best effort to create a productive and
enjoyable learning experience, and we ask that you help us in this endeavour by
adhering to the following guidelines:

Be on time: lectures start 5 minutes past the hour. With a class of this size, it will
take some time for everyone to settle in. To maximize the time for learning,
students are expected to arrive at the lecture theatre well before the lecture
starts. If you arrive early, please take seats in the front of the theatre, to leave
room for those arriving later. If, for reasons beyond your control, you arrive late
to a lecture, take a seat in the back of the theatre and avoid any disruption.

Out of courtesy to your fellow students, avoid disruptions: keep noise levels to a
minimum, switch your mobile phone (or blackberry etc.) off (or at least set it to
silent mode), avoid private conversations, do not slam doors, etc.

Facilitate effective communication: restrict questions to those relevant to the

subject, raise your hand before speaking, speak clearly and audibly, listen to what
others have to say, avoid unnecessary repetition.

Be prepared: pick up your materials in time and make sure to complete any
assigned pre-reading before attending lectures, read and make a bona-fide
attempt to solve the assigned problem sets before attending seminars, etc.

Because of the size of the class and the high turnover in the lecture theatres, it is
essential that you leave the classroom tidy: take your personal belongings with
you, return any spare handouts to the lecturer, dispose of rubbish in the bins, etc.
We believe that it is essential that all involved (including the teaching staff)
remember and respect these guidelines to create an effective and productive
learning environment.
We are professionals, and we expect nothing less from you.

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IB235

Finance 1: Financial Markets

Module Overview

D: Your Lecturers
Tao Li
University of Warwick

Tao is an Assistant Professor of Finance at Warwick Business School. Before joining the
School in 2013, he was a consultant at Deutsche Asset & Wealth Management in New
York, advising pension funds and other institutional investors on private real estate
investment strategies. He has also advised L.E.K. Consulting on corporate governance
practices. Taos research focuses on corporate finance, corporate governance and real
estate economics. His recent work studies how shareholder activism affects firm
performance, as well as the information content of hedge fund trading. Taos work has
been presented at conferences organized by the U.S. Securities and Exchange
Commission, European Commission, Society for Financial Studies, European Finance
Association, European Corporate Governance Institute and Columbia Law School. His
research has been mentioned in several media outlets, including Bloomberg. Tao has a
PhD in Economics and a Masters in Statistics, both from Columbia University. He also
holds graduate and undergraduate degrees in architecture. He has taught courses in
Corporate Finance, Investments, Financial Economics as well as Macroeconomics.

David Krap
Centerview Partners

David has more than a decade of experience advising clients across a range of sectors on
critical strategic issues. Recent transactions include advising Unilever on the $3.2 billion
voluntary tender offer for Hindustan Unilever; Apax on the sale of LR Health & Beauty
Systems; advising shareholders on the $875 million sale of Concern Kalina (Russia) to
Unilever; advising Unilever on the $3.7 billion acquisition of Alberto Culver; and advising
Candover on the sale of Ontex to TPG Capital and GS Capital Partners, amongst other
transactions.
Prior to joining Centerview as a Principal based in London, David was an Executive
Director in the UBS EMEA Consumer Products & Retail Group and previously was also a
member of the UBS EMEA M&A team. He has worked in London, Chicago, Hong Kong
and Singapore.
David is a trustee of Urban Music Development Foundation a charity based in east
London.
David is a German national and holds a first class degree (BA Hons.) in International
Business Administration with Spanish and Mandarin Chinese from EBS London.

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