Instructional goals
Upon successful completion of this course, students will be able to:
• Understand the structure, functions, and role of financial markets and institutions at global and national levels.
• Identify and critically analyze financial instruments, market mechanisms, and regulatory environments.
• Assess the interaction between monetary policy and financial markets, focusing on ECB, Fed, Bank of Italy, and CONSOB.
• Apply risk management and portfolio construction concepts to real-world scenarios.
• Develop analytical and practical skills to evaluate risks and returns using quantitative tools.
• Communicate financial market topics effectively, demonstrating critical thinking and problem-solving.
Prerequisites
Students enrolling in this course are expected to have a solid understanding of the core principles of economics and finance acquired during the first two years of the undergraduate program. In particular, they should have successfully completed courses in:
• Principles of Microeconomics and Macroeconomics
• Corporate Finance or Financial Management (introductory level)
• Statistics and Probability for Economics and Finance
• Fundamentals of Accounting
• Basic proficiency in Excel
Intended learning outcomes
Upon successful completion of this course, students will be able to:
Understand the structure, functions, and role of financial markets and institutions within the global and Italian economies.
Identify and critically analyze major financial instruments, market mechanisms, and the regulatory environment governing financial activities.
Assess the interaction between monetary policy and financial markets, and evaluate the impact of regulatory institutions such as the ECB, Federal Reserve, Bank of Italy, and CONSOB.
Apply fundamental concepts of risk management and portfolio construction to real-world financial scenarios.
Develop analytical and practical skills necessary for evaluating risks and returns in financial markets, supported by basic quantitative tools.
Communicate clearly and effectively about financial markets topics, both in written and oral form, demonstrating critical thinking and problem-solving abilities.
Course Contents
The course provides a comprehensive overview of financial markets and institutions, with particular emphasis on risk management, portfolio construction, derivative instrument valuation, and quantitative models. Through case studies, hands-on Excel exercises and simulations, students will develop applied analytical skills in financial markets.
Reference Books
• Mishkin, F.S. & Eakins, S.G. (2021), Financial Markets and Institutions, 10th Ed., Pearson.
• Howells, P. & Bain, K. (2020), The Economics of Money, Banking and Finance, 5th Ed., Pearson.
• Matthews, K. & Thompson, J. (2014), The Economics of Banking, 3rd Ed., Wiley.
• Fabozzi, F.J. (2021), Bond Markets, Analysis and Strategies, 10th Ed., Pearson.
• Bodie, Z., Kane, A. & Marcus, A.J. (2021), Investments, 12th Ed., McGraw-Hill.
• Hull, J.C. (2017), Options, Futures, and Other Derivatives, 9th Ed., Pearson.
Teaching Methods
• Lectures and case studies
• In-class discussions
• Hands-on exercises (Excel)
• External materials (reports, articles, videos)
Assessment Method
• Midterm written exam (40%) – compulsory
The midterm exam consists exclusively of multiple-choice questions covering topics from the first part of the course. Passing the midterm is compulsory in order to be admitted to the final exam.
• Final written exam (60%)
The final exam consists of two parts: (i) multiple-choice questions covering the entire course syllabus and (ii) a practical exercise in Excel. Students are required to demonstrate their understanding of the theoretical concepts and their ability to apply them to practical cases using quantitative tools.
Failure to achieve a minimum score of 18/30 will result in the exam not being passed.
A grade of 30/30 cum laude is reserved for students who answer all multiple-choice questions correctly and complete the Excel exercise accurately, demonstrating an excellent command of all topics covered in the course.
Thesis assignment criteria
• Submission of a research proposal (max 1 page)
• Discussion with the instructor
• Relevance to course themes
• Minimum grade achieved in this course: 27/30
• Maximum number of theses supervised: 5-6
Thesis supervision requests are accepted on a first-come, first-served basis, subject to verification that all requirements above are met. The instructor reserves the right to accept a maximum of 5-6 final thesis projects per academic cycle.
Week 1
Week 1: Introduction to Financial Markets
Lecture Topics:
Overview of the financial system: why financial markets exist and how they contribute to the economy.
Functions of financial markets: capital allocation, risk sharing, liquidity.
Classification of markets: primary vs. secondary, money vs. capital, organized exchanges vs. OTC markets.
Key players: households, firms, financial intermediaries, governments, and regulators.
Learning Objectives:
Understand the purpose and structure of financial markets.
Identify the different types of financial markets and their roles.
Recognize the key participants in the financial system and their interactions.
Reference Reading Material:
- Mishkin & Eakins Ch.1-2
- Howells & Bain Ch.1
- Bank of Italy Financial Stability Report (excerpt)
Week 2
Week 2: Structure and Types of Financial Markets
Lecture Topics:
Market segmentation: money markets vs. capital markets.
Debt vs. equity markets: characteristics, instruments, and participants.
Foreign exchange markets.
Understanding liquidity, market depth, transparency, and efficiency.
Introduction to financial market infrastructure: exchanges, clearing houses, custodians.
Learning Objectives:
Distinguish between different financial market segments and their roles.
Explain the differences between equity, debt, and derivative markets.
Understand how various market structures affect price formation and liquidity.
Recognize the importance of market infrastructure and intermediaries.
Understand the pricing mechanisms.
Reference Reading Material:
- Mishkin & Eakins Ch.11-12-13-15
- Howells & Bain Ch.3,5
- CONSOB Annual Report (excerpt)
Week 3
Week 3: Debt Instruments and Interest Rates
Lecture Topics:
Characteristics of debt instruments: short-term vs. long-term, fixed vs. floating, secured vs. unsecured.
Bond basics: pricing, yield to maturity, coupon, duration, convexity (introductory level).
Term structure of interest rates and the yield curve.
Factors affecting interest rates: default risk, liquidity, tax treatment.
Introduction to credit ratings and credit risk.
Learning Objectives:
Identify the main types of debt instruments and their market roles.
Understand how bonds are priced and how yields are determined.
Interpret the yield curve and explain what it signals about economic conditions.
Analyze key risks associated with fixed income securities.
Reference Reading Material:
- Mishkin & Eakins Ch.4-5
- Fabozzi Ch.1-2
- Bank of Italy yield curve data
Exercise session
Week 4
Week 4: Equity Instruments and Valuation
Lecture Topics:
Common vs. preferred stocks: characteristics and rights.
Primary and secondary equity markets: IPOs, SEOs, and trading venues.
Equity pricing fundamentals: dividend discount models (DDM), price-to-earnings ratios, and market multiples.
Introduction to the Capital Asset Pricing Model (CAPM) and the concept of risk-return trade-off.
Efficient Market Hypothesis (EMH): forms and implications.
Learning Objectives:
Understand the structure and functioning of equity markets.
Apply basic equity valuation models (DDM and P/E ratios).
Explain the CAPM framework and the role of beta.
Evaluate the implications of efficient market theory on pricing and investment decisions.
Reference Reading Material:
- Mishkin & Eakins Ch.8
- Bodie et al. Ch.5,6,13
- Howells & Bain Ch.6
Exercise session on DDM, P/E, CAPM
Week 5
Week 5: Financial Institutions and Regulation
Topics:
Functions of financial intermediaries: maturity transformation, risk reduction, information management.
Types of intermediaries: commercial banks, investment banks, insurance companies, mutual funds, pension funds, shadow banking.
Financial systems: market-based (US) vs. bank-based (EU).
Systemic risk: definition and implications.
Regulatory goals: stability, transparency, investor protection.
Italian institutional architecture: Bank of Italy, CONSOB, IVASS, COVIP.
European framework: ECB/SSM, ESMA, SRB, EBA.
Key regulations: MiFID II, CRD/CRR, BRRD.
Family Offices: structure, direct investing strategies, and their growing role in global financial markets.
Learning Objectives:
Understand the economic role of financial institutions.
Distinguish main categories of financial intermediaries.
Analyze the Italian and European supervisory structures.
Evaluate the role of regulation in risk prevention.
Understand the structure and investment strategies of Family Offices as emerging players in financial markets.
Readings:
Mishkin & Eakins ch.12-13
Howells & Bain ch.8
Matthews & Thompson ch.2
Instructor material: “Family Office – A New Force in Global Finance”
Week 6
Week 6: Monetary Policy and Financial Markets
Topics:
Central bank objectives: price stability, financial stability, economic growth.
ECB: institutional structure, monetary strategy, and tools.
Federal Reserve: dual mandate and policy implementation.
Bank of Italy: role in the Eurosystem.
Transmission mechanisms: interest rates, credit, asset prices.
Conventional and non-conventional tools: QE, negative rates, forward guidance.
Monetary communication and expectations.
Effects on bond, stock, and FX markets.
Learning Objectives:
Understand the goals and tools of central banks.
Analyze how monetary policy affects financial markets.
Evaluate the effectiveness of conventional and unconventional instruments.
Readings:
Mishkin & Eakins ch.14, 24-25
Howells & Bain ch.10-11, 13
ECB Strategy Paper – ECB Financial Stability Review
Week 7
Week 7: Financial Crises and the Role of Central Banks
Topics:
Central banks in crises: liquidity support, market interventions, lender of last resort.
2008 financial crisis: interbank freeze, shadow banking, Fed vs. ECB response.
Eurozone sovereign debt crisis: “Whatever it Takes”, OMT, TARGET2.
COVID-19 crisis: extraordinary monetary policy responses.
Moral hazard dilemma and long-term implications.
Learning Objectives:
Analyze the role of central banks in crisis management.
Understand emergency policy tools used in recent crises.
Evaluate long-term risks of central bank interventions.
Reflect on trade-offs between stability and incentives.
Readings:
Mishkin & Eakins ch.26
Draghi “Whatever it Takes”
ECB/Bank of Italy COVID and financial stability reports
Week 8
Week 8: Risk and Return – Foundations of Portfolio Theory
Lecture Topics:
Types of financial risk: market risk, credit risk, liquidity risk, operational risk.
Measuring return and risk: expected return, standard deviation, covariance, correlation.
Risk diversification: the power of uncorrelated assets.
The Efficient Frontier and the concept of the optimal portfolio.
Introduction to the Capital Asset Pricing Model (CAPM): systematic vs. idiosyncratic risk, beta, market portfolio.
Value at Risk (VaR): definition, interpretation, and practical application in Excel.
Learning Objectives:
Define and classify the main types of financial risk.
Measure risk and return using quantitative tools.
Understand and apply the principle of diversification.
Construct and interpret efficient portfolios.
Explain the logic and applications of the CAPM.
Calculate and interpret VaR as a portfolio risk measure.
Reference Reading Material:
- Bodie et al. Ch.5-7,9
- Mishkin & Eakins Ch.7
Exercise Session (Excel: 3-asset portfolio, covariance matrix, VaR)
Week 9
Week 9: Financial Derivatives – Structure and Functions
Topics:
The role of derivatives in financial markets: risk management, pricing, speculation.
Main instruments: forward contracts, futures, swaps.
Market mechanisms: functioning, main actors, regulated vs. OTC markets.
Comparison between derivative types: forward vs. futures.
Credit derivatives: Credit Default Swaps (CDS), how they work, use in credit risk management.
Value drivers of derivatives: underlying, maturity, counterparty risk.
Learning Objectives:
Understand the structure and functioning of main derivative instruments.
Distinguish between forward, futures, swaps and CDS.
Analyze the role of derivatives in financial markets.
Evaluate benefits and limits of both traditional and credit derivatives.
Readings:
Mishkin & Eakins, ch.24
Howells & Bain, ch.15
Week 10
Week 10: Hedging Strategies Using Derivatives
Topics:
Concept of hedging: reducing financial risk.
Hedging strategies using:
Forward contracts: hedge FX or price risk.
Futures: hedge interest rate or commodity risk.
Swaps: protect against interest rate or FX fluctuations.
Credit Default Swaps (CDS): protection against default risk.
Practical cases.
Learning Objectives:
Understand when and why to use derivatives for hedging.
Apply forward, futures, swaps and CDS in risk management strategies.
Assess the effectiveness, costs, and residual risks of hedging.
Develop hands-on skills in designing a hedging approach.
Readings:
Mishkin & Eakins, ch.24
Howells & Bain, ch.15
Week 11
Week 11: Options and the Black-Scholes Model
Lecture Topics:
Financial options: call, put, payoff structures, and usage logic.
Factors influencing option pricing.
Option valuation: arbitrage concepts and intrinsic value.
Introduction to the Black-Scholes model: assumptions and intuitive derivation.
Application of the model for pricing and hedging.
Reference Reading Material:
- Mishkin & Eakins Ch.24 (10th Ed.)
- Hull, chapter on Black-Scholes
- Excel exercises
Exercise Session
Week 12
Week 12: Option Pricing and Final Review
Topics:
European option pricing via Monte Carlo simulation.
Expected payoff estimation and discounting to present value.
Comparison with the Black-Scholes formula.
Final review: exercises on derivatives and hedging strategies.
Learning Objectives:
Apply Monte Carlo simulation to price European call and put options.
Understand how input parameters affect option pricing.
Consolidate derivative tools and hedging approaches for the final exam.
Readings:
- Mishkin & Eakins ch.24
- Instructor materials