Student guide Facoltà di Economia A.A. 2006/07

This course concerns the application of scientific tools to the investment activity. It deals with some of those scientific tools (models and procedures) that support financial decisions in the fields of

• the appraisal and comparison of investment projects;

• the appraisal, comparison and design of financial contracts;

• the management of financial risks.

There are two aims - to develop the students’ ability to represent reality by using models and to familiarise them with financial mathematics, the latter being a premise to financial engineering; needless to say, financial mathematics is based in some circumstances on notions that can be expressed only in mathematical terms. As for the investment activity, the course leads students to improve their understanding of its workings as well as of some of its procedures, learning what to analyse and how to approach a financial problem. To establish a link to the professional practice

• when presenting each financial problem some connections are made, whenever possible, to the main features of the setting where it arises; for instance, when presenting stocks and bonds a brief examination is put forward of the financial markets which they are traded on;

• emphasis is placed on models and procedures which are referred to in the professional practice, where the computer is used through, for instance, an electronic spreadsheet.

The material covered in each unit progresses from the simplest concept to the more advanced one. First the fundamentals of financial mathematics are presented as well as its basic applications. The acquired notions are then used to examine such applicative problems as the appraisal of companies, the selection of investment projects, the valuation of bonds, the management of interest rate risk, the measurement of a term structure of interest rates, the management of a stock portfolio. To cover the last subject, use is made of simple notions of probability theory.