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Financial Economics

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  • November 2012
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ECON 136 Final Review

-Unit Trust: basic financial economics in a nutshell
-Any chart that the professor has put up; be able to explain. The axis. What each item means, ex)) why the unit trust curve curved, not straight

-Law of one price
-Financial economics is arbitrage. Covered interest parity

-Don’t forget the simple stuff
-Calculating the return
-Cumulative Return distribution; Fat tail distribution; how badly things can move on a daily basis; Gaussian distribution could understate the real risk of the return structure. What is the fat tail? Why is it important to understand fat tail? Which ones are riskier? Why?

-Covered interest Parity and Keynes. Know your economists. What did they say?

-Understand the covered interest parity
-Look at the equation and plug in the numbers given, find out what the not-given variable is

-Know how to set up making money
-Setting up the arbitrage
-What do you do if you see the following structure? Violation of covered interest parity; arbitrage opportunity, locking in the return, guaranteed money

-Rule of thumb
-f/d version

-Synthetic Call
-Put-Call Parity
-What to do with option prices

-Covered call ; looks like risky debt
-Long the asset, Short the call
-How is it different from short put? : Premium on the put is much, much less; the whole graph is pushed downward; losses occur more ; important difference

-Unit trust comes up over and over again

-Put-Call Parity
-Core financial economics
-Make sure you know it for the exam
-Go back to the Problem set and work through it. Muscle memory -Understand how to make money out of the Put-Call Parity
-How you would construct a portfolio
-Go over the example sets

-Know your greeks
-What does the slop mean? Identify how you would point out gamma and delta -Slopes, Changes in slopes; how calculus comes in

-margin calculation
-Look again in your problem sets

-VaR; value at risk
-Just know all the things on the slide...

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