Foundations of Finance - Foundations of Finance, Group D 2

Participation Prerequisites

None

Course Content

This course introduces the fundamental concepts and tools of modern financial decision-making. It develops from the valuation of deterministic cash flows to financial decisions under risk and uncertainty.

The course comprises six main parts:

1. Value: compounding and discounting, net present value, annuities, internal rate of return, and investment decisions.
2. Bonds: bond pricing, the term structure of interest rates, duration, interest-rate risk, and credit risk.
3. Neoclassical Finance: efficient markets, expected utility, portfolio theory, diversification, and the Capital Asset Pricing Model (CAPM).
4. Derivatives and Exchange Rates: forwards, futures, options, no-arbitrage pricing, hedging, and purchasing power parity.
5. Cryptocurrencies and Blockchain: blockchain fundamentals, proof of work, proof of stake, proof of history, smart contracts, and NFTs.
6. Behavioral Finance: behavioral biases, capital-market anomalies, prospect theory, and behavioral portfolio decisions.

Throughout the course, neoclassical finance is contrasted with behavioral finance. The course emphasizes both the conceptual interpretation and the numerical application of financial models.

Intended Learning Outcomes and Competencies

Upon successful completion of the course, students will be able to:

• value cash flows, investment projects, annuities, bonds, and basic derivative positions;
• apply and critically assess net present value and internal rate of return decision rules;
• calculate and interpret expected utility, certainty equivalents, and risk premia;
• calculate expected returns, variances, covariances, correlations, and portfolio risk;
• explain diversification and interpret the efficient frontier and the Capital Market Line;
• apply the Capital Asset Pricing Model and distinguish systematic from diversifiable risk;
• explain and calculate the payoffs of forwards, futures, and options and apply basic no-arbitrage arguments;
• explain the economic foundations of blockchains, cryptocurrencies, and consensus mechanisms;
• identify behavioral biases and use prospect theory to explain deviations from neoclassical financial decision-making; and
• solve financial decision problems independently and communicate their calculations and economic interpretations clearly.

Instruction Type

In-person instruction.

Form of Examination

Written examination as part of the combined Finance module examination.

The Foundations of Finance component is designed as an open-book examination. The definitive examination duration, permitted physical materials, calculator requirements, and other procedural rules will be specified in the official examination announcement for the relevant cohort.

Literature

Basic reading:

• Brealey, R. A., Myers, S. C., Allen, F., and Edmans, A. (2025): Principles of Corporate Finance, 2025 Release, McGraw Hill.
• Bodie, Z., Kane, A., Marcus, A. J., and Racculia, N. (2026): Investments, 2026 Release, 13th edition, McGraw Hill.
• Thaler, R. H. (1999): “Mental Accounting Matters,” Journal of Behavioral Decision Making, Vol. 12, No. 3, pp. 183–206.

Optional reading:

• Copeland, T. E., Weston, J. F., and Shastri, K. (2013): Financial Theory and Corporate Policy, 4th edition, Pearson.