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Theory of Finance - ECO00085M

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  • Department: Economics and Related Studies
  • Credit value: 20 credits
  • Credit level: M
  • Academic year of delivery: 2023-24
    • See module specification for other years: 2024-25

Module summary

This module we provides an overview of the principles of modern finance theory. It covers a range of topics, which can be broadly divided into the theory of pricing fixed income securities; equity markets and derivative securities.

Module will run

Occurrence Teaching period
A Semester 1 2023-24

Module aims

This module we provides an overview of the principles of modern finance theory. It covers a range of topics, which can be broadly divided into the theory of pricing fixed income securities; equity markets and derivative securities. The module aims are:

  • To give an overview of the principles of modern finance.

  • To give the student a set of mathematical models and tools that can be used by those contemplating a career in finance or considering doing further research in this area.

  • To develop an intuitive understanding of all key concepts.

  • To provide sufficient training in the methods of finance so that students can formulate and solve typical problems that arise in this area.

  • To provide an opportunity for students to study, discuss and evaluate some research frontier dimensions of modern finance.

Module learning outcomes

After successful completion of the module students will be able to:

Subject content

  • Perform and solve problems involving advanced financial economics theory.

  • Apply the methods taught in the module to solve specific problems in finance.

  • Identify and justify apposite methods for asset pricing and financial decision making.

  • Identify the major issues in the study of modern finance.

  • Formulate a research proposal in finance.

Academic and graduate skills

  1. Advanced subject specific knowledge and understanding

  2. Cognitive (thinking) skills: through self-study and assessments

  3. Analytical skills required to undertake finance calculations.

  4. Ability to conduct research into financial issues individually analysis, synthesis and reporting

Module content

The course is divided into three sections: the theory of bond; equity markets and derivative securities. The aim will be to provide clear, intuitive explanations of key concepts. Most of the results will be proved to aid understanding. The course will include a lecture on stochastic calculus, which will be used in the section on derivatives and options.

The lectures will cover the following topics:

  1. Discount bonds and the time value of money

  2. Arbitrage and price consistency in coupon bond markets

  3. The Stochastic Discount Factor (SDF) Model

  4. Asset Pricing using Contingent Claims

  5. Interest Rates and Bond Valuation

  6. Fundamentals of Return, Expected Utility and Risk Aversion

  7. Portfolio Theory and Capital Asset Pricing Model (CAPM)

  8. Inter-temporal Models of Asset Pricing

  9. Stochastic Calculus

  10. Options and other Derivative Assets

Indicative assessment

Task % of module mark
Online Exam -less than 24hrs (Centrally scheduled) 100

Special assessment rules

None

Indicative reassessment

Task % of module mark
Online Exam -less than 24hrs (Centrally scheduled) 100

Module feedback

Students have access to feedback on individual assessments. General cohort assessment feedback is posted on the VLE after the marking is complete.

Indicative reading

Typed lecture notes will be distributed each week. These largely define the examinable content of the course. However, to get a good grasp of the subject it is necessary to read different accounts of the same material. A reading list of some basic references is given below.

Campbell J.Y, A. Lo and A.C. MacKinlay, (1997), “The Econometrics of Financial Markets”, Princeton University Press.

Cochrane J.H., (2005), “Asset Pricing”, Princeton University Press.

Ferson W., (2019), “Empirical Asset Pricing: Models and Methods”, The MIT Press.

Ingersoll J., (1987), “Theory of Financial Decision Making”, Rowman & Littlefield Publishers.

Hull J. (2021), “Options, Futures and Other Derivatives”, Pearson.


The information on this page is indicative of the module that is currently on offer. The University constantly explores ways to enhance and improve its degree programmes and therefore reserves the right to make variations to the content and method of delivery of modules, and to discontinue modules, if such action is reasonably considered to be necessary. In some instances it may be appropriate for the University to notify and consult with affected students about module changes in accordance with the University's policy on the Approval of Modifications to Existing Taught Programmes of Study.