Our area realizes the importance that finance plays in the Fuqua School's strategic plan. For the school to be ``leader in management education and research worldwide," we must have a strong finance group.
Indeed, finance plays an important role in almost all facets of business management. Finance interfaces with corporate strategy, marketing management, the design of incentive-compatible reward packages, control and operations management. The importance of a solid foundation in finance is evidenced by over 90% of Fuqua's MBA class enrolling in the second-year elective course in Corporate Finance (BA 351). In addition, more than half of our graduates choose a career in finance.
Our strategy is to offer four levels of finance course. The foundational course, Financial Management, feeds into three core finance courses: Corporate Finance, Investment and Derivatives. With these core courses, students can then specialize with more advanced electives.
While detailed descriptions of each course are available, let us put the foundational course and the core into the context of our strategic plan.
Over the last year, this course has undergone a significant restructuring. We took the opportunity of preparing the finance course offering for GEMBA to redesign our foundational course.
We begin my moving some of the basic concepts of present value out of the course. Students should be exposed to these ideas in the accounting and economics course. Nonetheless, we have a detailed pre-lecture note which provides the background for the concept of present value. There is also an interactive assignment in Javascript which tests the student's mastery of the basic concepts. We require that this assignment be completed before the first lecture.
Next, we decided to begin the course with a focus on some of the practical aspects of finance - rather than ending the course with section. We require that the students initiate a portfolio of equities where $1 million is initially invested. We strongly encourage students to invest in stocks that are traded outside the U.S. We provide detailed information as to how to use the Internet and Bloomberg to get the quotations on international stocks. We allow for trading via an HTML form facility. Student are required to hand in (email) their initial portfolio before the first lecture. Of course, the value of this exercise is not the ``picking" of the right stocks - it is what you learn by following the stocks. Latter in the course we add to this portfolio, $0.5 million in options and $0.5 million in futures.
The foundational course focuses on the building blocks for the core and elective courses. We begin by studying bond valuation which is key for the Investment, Derivatives, and Corporate Finance course. This topic logically evolves into project evaluation and capital budgeting examples which are especially important for the Corporate Finance courses.
The course quickly switches into derivatives. Perhaps one of the most unique aspects of the Duke finance curriculum is the focus on derivatives. At many schools, either derivatives are ignored or given short-change in the foundational course. We are taking a strategic gamble that derivatives will become even more important in the future. We have allocated a large time slot for derivatives in the intro course. Furthermore, we designate Derivatives as a core course. In addition, derivatives are used extensively in many of our other courses: Investment, Advanced Corporate Finance, Money and Capital Markets, International Corporate Finance, Financial Institutions, and, of course, Advanced Derivatives.
The foundational course then focuses on the principal of diversification. We establish the basics of portfolio theory which are used extensively in Investment and International Investment.
The course emphasizes the importance of understanding asset pricing theory in corporate finance. The asset pricing models are applied to project evaluation decisions which are relevant for Corporate Finance, Advanced Corporate Finance, International Corporate Finance, and Corporate Restructuring.
We divert from theory to practice and focus in on the evaluation of managers. We show how to apply theory to the problem of evaluating the performance of money managers, mutual funds, and divisional heads within the corporation. The divisional performance evaluation is very much related to the concepts of Economic Value Added and related topics in Advanced Corporate Finance, International Corporate Finance, and Corporate Restructuring.
While there is international content throughout the course, the next modules focus on the basics of international financial management. Students are exposed to interest rate parity. They are taught these concepts by implementing arbitrage portfolios consistent with the earlier part of the course. We also focus on the international project evaluation process and how it differs from the domestic problem. We discuss the concept of ``country risk" and its implication for project management. This part of the course feeds the material in International Corporate Finance and International Investment, and to some degree Money and Capital Markets.
The course closes with another derivative application - except this time in corporate finance. That is, our strategy makes the point that all students of finance (and even if you choose not to specialize in finance) should take the core derivatives course. Option pricing theory is very important corporate finance. We focus on a number of examples where naive implementation of present value accounting for project evaluation fails. This falls into the category of Real Options.
Consider an example. A firm is considering one of two plants that produce energy. The first plant is oil fired. The second plant has the capability of using coal or oil. The second plant is more expensive. Given oil and coal price projections, the net present value of the oil fired plant is higher. However, this is an example of a naive implementation of present value. The second plant has an embedded option. If the oil price jumps higher, this plant can switch to coal. This is a valuable real option. It might be the case oil/coal plant has higher value once the option is properly accounted for.
The real option section blends both investment and corporate finance together. In the past (and in many current MBA programs), a corporate finance specialist may choose to avoid investment and derivative courses. In Duke's program, this is not advised. We forcefully make the point that derivative material (as well as other investment concepts) are critical to a corporate finance manager's success.
Our foundational course ends with a discussion of shareholder value. This concept draws all aspects of the course together. It is the glue that connects the valuation exercises at the beginning of the course, the theory of diversification and the project evaluation sections.
This second level of courses is designed to provide the intermediate step to the more advanced electives. While detailed descriptions are available, we will provide a general overview.
The Corporate Finance course uses almost every aspect of the foundational course and focuses exclusively on the corporate - rather than investment - side of finance. The course provides the tools for Advanced Corporate Finance, International Corporate Finance, and Corporate Restructuring.
The Investment course uses the foundational course material related to asset pricing and valuation. The course explores alternative asset pricing formulations and goes into considerable detail on the problem of performance evaluation. Perhaps, most importantly, the course stresses the dynamic nature of the investment process. Models are introduced that explicitly allow for risk and expected return to shift through time. The course also provides the students with an introduction to some of the microstructural issues in security markets. This course provides the tools for: International Investment, Money and Capital Markets, Financial Institutions, and Market Microstructure
The final core course is Derivatives. This course builds from a introductory base of knowledge in the foundational course. The students are introduced to the binomial option pricing model. The focus is on recognizing when and where to apply certain option pricing models. There is a strong practical part of the course focused on hedging. Students are also exposed to some recent ``derivative disasters.'' These case-like studies provide insight as how to avoid mistakes of the past. This course provides critical material for: Money and Capital Markets and Financial Institutions. In addition, the tools learned in this course (such as the binomial pricing model), are used in corporate finance courses, like: Advanced Corporate Finance and Corporate Restructuring.
The elective courses are described in other sections. As is reality in the market place, many of the electives are quantitatively challenging. Our courses are designed, however, to allow a student with a non-quantitative background to excel in all of our offerings.
One unique aspect of our electives is that we strongly encourage our faculty to bring their own research into the course material. The school's strategy is to become a research leader - not just a teacher leader worldwide. Hence, it is very important that the students are exposed to the type of research that our finance faculty are doing. In almost all elective courses, the faculty member has required readings from their research portfolio. Indeed, we will often put unpublished working papers in the required readings. This gives the students a glimpse of what will impact the practice of management in the future.
The main problems that we face is a shortage of faculty. We have 11 tenure track faculty in finance and we need at least 15. While we could easily hire an extra four faculty, we want the right people. We want the people that will move us towards the goal of world leadership in terms of research and teaching. This means that we have to be patient.
We have plugged some of the teaching shortage with excellent visiting faculty and by teaching overloads. However, this is a short-term solution. Visiting faculty are not expected to do service (administrative and other) for the school and, as a result, the small group of tenure-track faculty have to do extra work.
As a result of this shortage, there are courses that we would like to offer that we cannot staff. For example, we have no courses on Entreprenneurial Finance and Venture Capital. Real Estate Investment is taught by an adjunct professor. Furthermore, we have only one course on Financial Institutions and no courses in Banking. We also have no offerings in Insurance.
In past recruiting, we have pursued top candidates in these fields but have not been able to secure these candidates. Our strategy is to continue to put offers to the best people.
We are constantly working on redesign. Finance has evolved as a field to the extent that the foundational course offering in Fall 1985 has practically no overlap with the course offering in the Fall of 1984.
Over the past year, we have significantly altered the foundational course Financial Management.
This year we will be examining the content of Investment. This course has been taught by an adjunct professor over the last three years and is due for some overhauling.
This year we will also be examining jointly the content of Money and Capital Markets and Financial Institutions to eliminate any possible redundancies.
We have been challenged by a new medium: the internet. The strategy of our group is to view the internet as an opportunity - not a threat. The foundational course now contains a number of Java teaching applications which we will shortly make proprietary.
We believe that the Java applets on the internet can provide us with proprietary learning experiences that will distinguish our finance group as a world leader in finance education.