The valuation formulas used throughout the modern financial world are based on the economic theory of financial markets and general equilibrium. This course provides a treatment of the economic foundations of modern finance. We start with a discussion of how economic agents (should) make decisions when the economic environment is uncertain. Then, asset-pricing models are introduced, and we discuss how economic uncertainty can be dealt with using state-contingent securities, which in turn lead to efficient market outcomes when markets are complete. Further topics include option pricing, determination of firms' value and its relation to a firm's capital structure, and the theory of efficient portfolios. The tools and knowledge that students acquire in this course are particularly useful and sought after in the public and private finance sector.
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