Incomplete financial markets

The course is offered at the first-cycle level and is part of the fifth semester of the Bachelor’s Programme in Business and Economics for students majoring in Financial Economics. It is also available as a freestanding course and is open to incoming exchange students.

Department of Economics

Department of Business Administration

To be eligible for the course, the student must have successfully completed at least 60 credits in first cycle courses in Business administration or Economics and completed EFI242 Finance, Intermediate Course (7.5 credits) or equivalent.

Most theories that have been discussed in previous courses in finance have implicitly assumed complete markets and that all assets can be traded. A complete market would allow trading in important assets such as human capital or future projects. These features of the economy will lead to allocations and prices that are in-consistent with standard asset pricing models such as Capital Asset Pricing Model (CAPM).

We will in this course show that options can make the market "almost" complete. It is therefore important that the assumptions on which we base our option pricing hold. One such critical assumption is the possibility of short-selling, i.e. selling assets that you do not own. The course also deals with the opposite, for example, when individuals cannot mortgage their future income; and how we should price an option contract to employee's (CEO) that cannot short the underlying asset.

We will also give a background to Real Options, i.e. methods to evaluate investments where you have the flexibility to defer, expand and abandon the investment. The course will present some theories but is mostly focused on professional implementation of solutions to these problems.

After passing the course, students shall be able to::

1. value a project (real-options) where part of the value stems from development of the project,

2. make an asset allocation where the allocation depends on how the value of human capital is dependent on the equity market,

3. value options, which can not be hedged.

Lectures and casework.

Language of instruction: English

Written exam, two written case reports, and a research proposal (case assignments performed in group). Objectives 1 and 2 are partly assessed by the written reports and the research proposal. All objectives are assessed by the written exam.

If a student who has been failed twice for the same examination element wishes to change examiner before the next examination session, such a request is to be granted unless there are specific reasons to the contrary (Chapter 6 Section 22 HF).

If a student has received a certificate of disability study support from the University of Gothenburg with a recommendation of adapted examination and/or adapted forms of assessment, an examiner may decide, if this is consistent with the course’s intended learning outcomes and provided that no unreasonable resources would be needed, to grant the student adapted examination and/or adapted forms of assessment.

If a course has been discontinued or undergone major changes, the student must be offered at least two examination sessions in addition to ordinary examination sessions. These sessions are to be spread over a period of at least one year but no more than two years after the course has been discontinued/changed.

If a student has been notified that they fulfil the requirements for being a student at Riksidrottsuniversitetet (RIU student), to combine elite sports activities with studies, the examiner is entitled to decide on adaptation of examinations if this is done in accordance with the Local Rules Regarding RIU Students at the University of Gothenburg.

The grading scale comprises: Excellent (A), Very good (B), Good (C), Satisfactory (D), Sufficient (E) and Fail (F).

To obtain a passing course grade, students must receive a passing grade on the individual written examination, the two case assignments and the research proposal. The written exam is worth 60 points (for a pass on the course at least 30 points is required). The case assignments and the research proposal are worth a total of 40 points (for a pass on the course at least 20 points is required and a minimum of 50% of the total points for each examination). The final grade corresponds to the total score a student obtains.

Upon completion, the course will be subject to a course evaluation in accordance with the procedures established for the Bachelor's Programme in Business and Economics. The results of the evaluation, along with any resulting changes to the course, will be communicated to both the students who participated in the evaluation and those enrolled in the subsequent offering of the course.