Financial derivatives and real options

The course builds on and expands the students' skills in financial theory and applications, focusing on asset/option pricing theory in particular. Assets include derivatives such as futures, forwards, swaps and options. This is used in analysing financial securities/instruments and real assets, and in project evaluation under uncertainty using real option analysis. We analyse the most common financial derivatives markets and its products. The course includes a description of technical and economic characteristics of project risk and an option-based valuation of flexibility in projects. The knowledge and theory is also applied to analysis of compound investment strategies, financial instruments, large-scale investments and project finance, and entrepreneurial finance and valuation of small projects.

Position and function within the study program: This is an elective course in the 8. semester of the MTIØT program, and is part of the qualification for the specialization in Financial Engineering. It builds on TIØ4145 Corporate Finance. We make use of the knowledge gained in the compulsory courses in mathematics, statistics and information technology, and in TIØ4118 Industrial Economic Analyses. The course fits well with TIØ4317 Empirical and Quantitative Methods in Finance. It contributes to the learning objective of the MTIØT program, point 4.1, regarding Asset pricing models, Valuation and optimal exercise of financial and real options, and Financial risk measurement and management. The course will convey the following knowledge: - The theoretical foundation regarding project evaluation and asset pricing under uncertainty. The course will develop the following skills: - Training to think about general projects as a collection of real options. - The students should aquire the skills necessary to analyse stylized projects under uncertainty, and to value and hedge cash flows coming from positions in common derivative financial securities. Other important learning objectives: - Give training in implementation of financial models in spreadsheets and other relevant software.

Lectures and exercises. The course language will be English.