How to build a financial markets and institutions course: a complete guide for lecturers

Central question: Why do financial markets and institutions exist, and when is funding better organised through markets rather than intermediaries?

Start by giving students a map of the financial system rather than a list of products. The useful organising distinction is between direct finance through securities markets and indirect finance through intermediaries. From there, lecturers can show how information asymmetry, transaction costs, liquidity, maturity transformation and risk sharing explain why banks, funds, insurers, exchanges and dealers coexist.

What this concept covers

• Direct and indirect finance, primary and secondary markets, and the flow of funds between surplus and deficit units.
• The roles of banks, investment funds, insurers, pension funds, broker-dealers, exchanges and central banks.
• Information asymmetry, adverse selection, moral hazard and transaction costs as reasons intermediaries exist.
• Liquidity transformation, maturity transformation, risk pooling and payments as institutional functions.
• How regulation, technology and market structure alter the boundary between market-based and bank-based finance.

Learning outcomes

By the end of this concept, students should be able to:

• Map the principal institutions and markets in a modern financial system.
• Distinguish direct financing from intermediary-based financing.
• Explain why information and transaction costs affect institutional design.
• Compare the functions of banks, funds, insurers and securities firms.
• Identify which balance-sheet or market channel carries a financial shock.

How to teach it

• Draw a funds-flow map from households and institutional investors to firms and governments.
• Give groups one financing need and ask them to route it through a bank loan, bond issue or equity issue.
• Use the same borrower to compare what changes when the lender holds the asset to maturity versus distributes it to markets.
• Ask students to identify the intermediary function in familiar products such as deposits, mortgages, ETFs and payment accounts.

Case-style example

Meridian Mobility needs €120 million for a new plant. A bank offers a five-year loan at 6.4%, while advisers estimate a bond could be issued at 5.9% but with €3.5 million of underwriting and legal costs. Students calculate first-year financing cost, then compare monitoring, refinancing and information-disclosure implications. One group should defend bank intermediation and another market finance. Students discover that the lowest coupon is not automatically the lowest-cost or lowest-risk funding channel.

Where students struggle

Students often memorise institution names without seeing their economic function. A second problem is assuming that securitisation or market finance eliminates intermediation. In practice, the form of intermediation changes and new institutions take on screening, market-making, custody, liquidity or risk-transfer roles.

Reading and a quick check

Use Mishkin and Eakins, Chapters 1, 2 and 7. Quick check: ask students to draw the financing chain for a mortgage from household deposit or fund capital through origination, possible securitisation and final investor ownership.

Applied teaching activity

A short balance-sheet and flow-of-funds workshop works better than forcing a simulation at this stage.

Where it leads

The map becomes useful only once students can price money through time. The next concept therefore moves to interest rates, discounting and the term structure.

Central question: What do market interest rates tell us about time, risk and expectations, and why do rates differ across maturities and borrowers?

Interest rates are the price that links nearly every market in the course. Teach them as both valuation inputs and equilibrium outcomes. Students need to move comfortably between present value, yields, real and nominal rates, risk premia and the yield curve, but the objective is not a fixed-income mathematics course. The objective is to interpret what rates mean for institutions and financing decisions.

What this concept covers

• Present value, yield to maturity and the relationship between price and yield.
• Real versus nominal interest rates and expected inflation.
• Default, liquidity and tax components of risk premia.
• Expectations, term premia and competing explanations of the yield curve.
• Duration intuition and why long-duration assets are sensitive to rate changes.

Learning outcomes

• Interpret quoted interest rates and yields in economic terms.
• Explain why bond prices move inversely with yields.
• Separate inflation expectations, credit risk, liquidity and term premia conceptually.
• Read an upward, flat or inverted yield curve without treating it as a mechanical forecast.
• Assess how rate changes affect borrowers, lenders and long-duration assets.

How to teach it

• Use a two-bond comparison before introducing a full yield-curve graph.
• Ask students to explain the same yield-curve move from an expectations view and a term-premium view.
• Connect rate moves to a bank balance sheet, a pension liability and a corporate bond.
• Keep calculation questions short and use the saved time for interpretation.

Case-style example

Northstar Treasury observes two-year government yields at 3.1% and ten-year yields at 4.4%. A five-year corporate bond yields 5.6%, and expected inflation is 2.3%. Students decompose the observed yields qualitatively, calculate the corporate spread over a same-maturity 4.0% government benchmark, then debate whether the steep curve mainly signals stronger future growth or a larger term premium. Students discover that the same curve can support different narratives unless evidence identifies the mechanism.

Where students struggle

Students commonly equate an inverted curve with a guaranteed recession or assume a spread is a pure measure of default probability. Emphasise that yields embed multiple premia and that observed prices are equilibrium outcomes rather than single-variable forecasts.

Reading and a quick check

Use Mishkin and Eakins, Chapters 3-5. Quick check: give students three market yields and ask which component of the spread they can identify from the data and which components remain unobserved.

Applied teaching activity

A yield-curve interpretation memo or duration worksheet is the right applied activity here.

Where it leads

Interest rates become policy variables as well as market prices. Students can now examine how central banks influence short rates, liquidity and financial conditions.

Central question: How do central-bank decisions transmit through money markets, banks, bond yields, asset prices and the wider economy?

Financial Markets and Institutions courses become fragmented when monetary policy is taught as a macroeconomics detour. Keep it inside the financial system. Focus on the operating framework, the policy rate, reserves and liquidity, then trace transmission into funding costs, lending standards, market yields, asset prices and exchange rates. The teaching question is how a policy action changes institutional incentives and market prices.

What this concept covers

• Central-bank balance sheets, reserves and the implementation of policy rates.
• Conventional policy rates and non-conventional tools such as asset purchases and lending facilities.
• Interest-rate, credit, asset-price, expectations and exchange-rate transmission channels.
• Central-bank lender-of-last-resort and market-functioning roles during stress.
• The tension between price stability, financial stability and moral hazard.

Learning outcomes

• Trace a policy-rate change through at least three financial-system channels.
• Distinguish monetary-policy implementation from broader financial-stability intervention.
• Evaluate how tightening or easing affects bank margins, credit supply and market valuations.
• Explain why transmission varies across balance sheets and market structures.
• Critique a central-bank intervention using both stabilisation and incentive arguments.

How to teach it

• Use a central-bank balance sheet before discussing policy instruments.
• Give groups different institutions - bank, bond fund, insurer, corporate treasury - and ask how the same rate change affects each.
• Run a short policy committee debate on whether a market intervention is monetary policy, lender-of-last-resort support or market-functioning support.
• Connect every policy tool to an observable market price or balance-sheet effect.

Case-style example

Harbour Bank holds €3.0 billion of fixed-rate securities with an average duration of 5.5 years and funds itself mainly with deposits. The central bank raises its policy rate from 2.5% to 4.0%. Students estimate the direction and rough magnitude of market-value pressure using duration, then debate whether higher asset yields or faster deposit repricing dominates future net interest income. Students discover that the same tightening can improve income prospects while weakening market values and liquidity resilience.

Where students struggle

Students often reduce monetary policy to "rates up, prices down." That misses the institutional channel: asset and liability repricing occurs at different speeds, unrealised losses may interact with funding, and central-bank facilities may change liquidity without removing solvency risk.

Reading and a quick check

Use Mishkin and Eakins, Chapters 9-10, supplemented by current central-bank material. Quick check: ask students to distinguish a rate-setting decision, a liquidity facility and an emergency market purchase by objective and transmission channel.

Applied teaching activity

Use a policy-transmission map and a short central-bank decision brief.

Where it leads

Policy is implemented first in short-term funding markets, so the next concept examines money markets, repo and liquidity.

Central question: How do institutions obtain short-term funding, and why can apparently safe markets become unstable when haircuts, collateral or liquidity conditions change?

Money markets are where monetary policy, bank liquidity and securities-market plumbing meet. Teach treasury bills, commercial paper and certificates of deposit, but give special attention to secured funding and repo because it exposes the mechanics of collateral, haircuts and leverage. Students should see funding liquidity and market liquidity as related but distinct.

What this concept covers

• Treasury bills, commercial paper, certificates of deposit and other short-term instruments.
• Repo and reverse repo, collateral, haircuts, margin and rollover.
• Wholesale funding versus stable deposit funding.
• Funding liquidity, market liquidity and the feedback between them.
• Central-bank reserves and standing facilities as part of the liquidity system.

Learning outcomes

• Compare major money-market instruments by issuer, maturity, risk and use.
• Calculate the cash financing produced by a repo haircut.
• Explain how rising haircuts can force deleveraging.
• Distinguish a liquidity shortage from a solvency problem.
• Assess the role of central-bank facilities when private funding markets seize up.

How to teach it

• Use a repo balance-sheet diagram with cash on one side and collateral on the other.
• Change the haircut in stages and ask students to calculate the resulting funding gap.
• Compare a bank funded by retail deposits with a dealer funded by secured wholesale borrowing.
• Use a stress scenario to connect margin calls, forced sales and falling collateral prices.

Case-style example

Metro Securities owns $500 million of government bonds and initially funds them in repo at a 2% haircut, requiring $10 million of equity. Stress pushes the haircut to 8%. Students calculate the new equity requirement and $30 million incremental funding need, then choose among selling bonds, raising cash or using an eligible central-bank facility. One side argues sales restore discipline; the other argues they amplify market dysfunction. Students discover how haircut shocks can create a liquidity spiral without an initial credit loss.

Where students struggle

Students may call every funding problem insolvency or assume government collateral makes repo risk-free. Emphasise counterparty exposure, collateral volatility, rollover risk and operational timing.

Reading and a quick check

Use Mishkin and Eakins, Chapter 11, plus a current central-bank or BIS note on repo where appropriate. Quick check: ask students what changes economically when the haircut rises from 2% to 8% even if the collateral price is unchanged.

Applied teaching activity

A repo haircut and liquidity-stress worksheet is more targeted than a general simulation.

Where it leads

Short-term funding supports longer-dated assets. Students can now move into bond markets, credit spreads and debt pricing.

Central question: How do investors price promised cash flows when default risk, liquidity and changing interest rates all matter?

The bond-market block should join valuation with institutional judgement. Students need coupon, yield and spread mechanics, but the bigger question is why two issuers borrowing for the same maturity pay different rates and why that spread changes. Connect corporate and sovereign bonds to credit analysis, ratings, recovery, liquidity and primary versus secondary market conditions.

What this concept covers

• Government and corporate bond structures, issuance and secondary trading.
• Coupon, yield, price, duration and spread relationships.
• Default probability, loss given default, recovery and credit ratings.
• Credit spreads as compensation for expected loss, liquidity, risk appetite and uncertainty.
• Dealer intermediation and why bond-market liquidity can vary sharply in stress.

Learning outcomes

• Price and interpret a plain-vanilla bond at a basic level.
• Explain why credit spreads move independently of government yields.
• Distinguish expected credit loss from the full observed credit spread.
• Evaluate debt from both issuer and investor perspectives.
• Connect secondary-market pricing to a borrower's primary-market funding cost.

How to teach it

• Compare a government and corporate bond with the same maturity.
• Ask students to reconcile a rating, spread and recovery assumption rather than treating any one as sufficient.
• Use a current bond screen or supplied data extract without requiring a commercial terminal.
• Have students write a short lender memo that explains a price or spread in words.

Case-style example

Cedar Manufacturing plans a five-year €200 million bond. Comparable government bonds yield 3.8%; Cedar's bankers suggest 5.4%-5.8%, and a peer with similar leverage trades at a 165 basis-point spread. Students estimate Cedar's indicative spread, compare annual interest cost at each end of the range, then debate whether weak secondary-market liquidity justifies paying above the peer. Students discover that an issuer's cost of debt reflects credit and market conditions, not only forecast default loss.

Where students struggle

Students tend to treat ratings as prices or spreads as default probabilities. Require them to name the non-default components of a spread and to explain why liquidity and risk appetite matter.

Reading and a quick check

Use Mishkin and Eakins, Chapter 12, with Chapter 5 for risk structure. Quick check: ask why a credit spread might widen even if the issuer's expected cash flows have not changed.

Where a simulation fits

After students can interpret yields, spreads and lender risk, the Debt Financing Simulation can extend the concept into pricing, maturity, security and covenant negotiation rather than leaving debt as a quoted yield.

Where it leads

Debt is only one market claim. The next concept shifts to equity trading, price formation and the institutions that make secondary markets work.

Central question: How are equity prices formed in real markets, and what roles do exchanges, brokers, dealers, order types and liquidity play?

An institutions course should move beyond dividend-discount valuation and explain how trading actually happens. Market microstructure gives lecturers a practical way to connect information, liquidity, bid-ask spreads, order flow and price discovery. The aim is not to train traders, but to show why the institutional design of a market affects execution quality and sometimes financial stability.

What this concept covers

• Primary versus secondary equity markets and the functions of exchanges and trading venues.
• Brokers, dealers, market makers, custodians and clearing infrastructure.
• Market and limit orders, bid-ask spreads, depth and execution.
• Information, order flow, short selling and price discovery.
• Retail participation, payment for order flow and the trade-off between access and market quality.

Learning outcomes

• Explain how a trade moves from order entry to execution, clearing and settlement.
• Interpret bid-ask spread and market depth as dimensions of liquidity.
• Assess how informed and uninformed trading affect price discovery.
• Compare broker and dealer business models.
• Evaluate a market-design issue without assuming that low explicit commission means zero intermediation cost.

How to teach it

• Use a simplified limit-order book and ask students to execute market and limit orders.
• Assign one group the investor perspective, one the broker and one the market maker.
• Use the GameStop or Robinhood case to discuss retail access, short interest, execution and platform incentives.
• Link microstructure back to the efficient-markets discussion rather than treating them as competing topics.

Case-style example

Lumen Technologies has a quoted bid of $39.80 for 12,000 shares and an ask of $40.10 for 8,000 shares. A fund wants to buy 20,000 shares quickly. Students calculate the quoted spread, identify why the displayed ask depth is insufficient, then compare a market order with staged limit orders. One group prioritises certainty; another minimises market impact. Students discover that execution quality depends on liquidity and urgency, not simply the last traded price.

Where students struggle

Students often treat "the stock price" as a single frictionless number. Make the spread, depth, timing and counterparty visible, then ask which price is relevant to a large buyer or seller.

Reading and a quick check

Use Mishkin and Eakins, Chapters 6 and 13. Quick check: ask students why two investors can observe the same fundamental value estimate but rationally choose different order strategies.

Applied teaching activity

Use a limit-order-book exercise and a short market-design case discussion.

Where it leads

Secondary markets rely on institutions, but banks remain central to credit and payments. The next concept opens the bank balance sheet.

Central question: How do banks create value from deposits, lending, payments and liquidity transformation, and why does that business model create fragility?

Teach the bank as a balance sheet before teaching banking regulation. Students should see how loans, securities, reserves, deposits, wholesale funding and equity interact. Then introduce net interest margin, maturity transformation and liquidity creation. The central trade-off is straightforward: banks create economic value by issuing liquid claims against less-liquid assets, but that structure makes confidence and funding stability important.

What this concept covers

• Bank assets, liabilities, equity and the basic accounting identity.
• Deposits, wholesale funding, loans, securities and reserves.
• Net interest income, fee income and profitability.
• Maturity transformation, liquidity creation and asset-liability management.
• Credit, interest-rate, liquidity and operational risks on the bank balance sheet.

Learning outcomes

• Read a simplified bank balance sheet and identify its main risk positions.
• Explain how banks earn a spread while transforming maturity and liquidity.
• Analyse how deposit mix affects funding stability and pricing.
• Connect changes in market yields to asset values and net interest income.
• Identify when a liquidity problem can become a solvency problem through forced asset sales.

How to teach it

• Build a bank balance sheet from scratch with the class.
• Reprice assets and liabilities after a rate shock.
• Compare insured retail deposits, uninsured corporate deposits and wholesale funding.
• Use Silicon Valley Bank later as an integration case rather than presenting it as a one-variable duration story.

Case-style example

Harbourline Bank has €10 billion of assets: €6 billion loans, €3 billion securities and €1 billion reserves. It funds them with €8.6 billion deposits, €0.6 billion wholesale debt and €0.8 billion equity. Forty percent of deposits are uninsured corporate balances. Students calculate the equity ratio and liquid-asset share, then debate whether the deposit concentration or the securities duration is the more urgent risk. Students discover that bank fragility is usually an interaction between assets and funding.

Where students struggle

Students often analyse the asset side and liability side separately. Force every risk discussion to answer two questions: what happens to asset value or cash flow, and how does the institution fund itself while that happens?

Reading and a quick check

Use Mishkin and Eakins, Chapter 17. Quick check: ask students to explain why a bank can be profitable on an accrual basis and still face a liquidity crisis.

Where a simulation fits

Debt Financing works after this concept if you want students to take a lender perspective on borrower cash flow, leverage and protections. It does not simulate a commercial bank balance sheet, so frame it as credit intermediation rather than bank asset-liability management.

Where it leads

Once students understand the economic model of a bank, regulation becomes a response to identifiable risks rather than a list of ratios.

Central question: How should regulation constrain financial institutions without eliminating the risk taking and intermediation the system needs?

Regulation is easiest to teach after students can identify the underlying risk. Link capital rules to loss absorption, liquidity requirements to funding stress, supervision to information problems and resolution to the externalities of disorderly failure. Keep the treatment internationally portable by teaching the logic of capital and liquidity rather than memorising one jurisdiction's rulebook.

What this concept covers

• Capital as a loss-absorbing buffer and the distinction between book equity and regulatory capital.
• Risk-weighted assets, leverage measures and basic capital adequacy logic.
• Liquidity buffers, funding stability and stress testing.
• Deposit insurance, lender-of-last-resort support and moral hazard.
• Supervision, resolution, bail-in and systemic externalities.

Learning outcomes

• Explain why bank capital and liquidity requirements solve different problems.
• Interpret simple capital and liquidity ratios without treating thresholds as guarantees of safety.
• Evaluate how deposit insurance changes depositor incentives.
• Assess a stress scenario using solvency, liquidity and contagion lenses.
• Compare prevention, supervision and resolution tools.

How to teach it

• Start from a loss on the balance sheet and ask where it is absorbed.
• Run a simple stress test with credit losses, deposit outflows and securities haircuts.
• Use threshold ratios as starting points for judgement rather than teaching regulatory compliance detail.
• Debate whether an intervention protects the system, the institution or particular claimants.

Case-style example

Pioneer Bank reports €5.0 billion of risk-weighted assets and €510 million of CET1 capital, while its liquidity buffer is €1.4 billion against €1.2 billion of stressed net outflows. A severe scenario creates €170 million credit losses and €90 million securities losses. Students calculate the starting CET1 ratio, subtract losses, and assess whether capital or liquidity is the tighter constraint. Groups then choose between cutting dividends, raising equity or shrinking assets. Students discover that "well capitalised" and "liquid" are separate judgements.

Where students struggle

Students may confuse capital with cash. Use separate columns for loss absorption and payment capacity throughout the session. Also avoid implying that compliance with a minimum ratio removes run or interest-rate risk.

Reading and a quick check

Use Mishkin and Eakins, Chapters 18 and 23. Quick check: ask why a bank with ample capital can fail to meet withdrawals and why a highly liquid bank can still be insolvent.

Where a simulation fits

Debt Financing can reinforce the lender side of prudential thinking by making pricing, covenants, security, seniority and repayment terms visible. Keep regulatory capital as a separate teaching layer.

Where it leads

Banks are only part of the system. The next concept examines funds, insurers, pensions and private credit, where similar functions appear in different legal forms.

Central question: How do investment funds, insurers, pension funds and other non-bank institutions perform financial intermediation, and where can their liquidity or leverage risks affect the wider system?

A modern Financial Markets and Institutions course should not stop at commercial banks. Mutual funds, money market funds, exchange-traded funds, insurers, pension funds, hedge funds and private-credit vehicles now channel large pools of savings into markets. The teaching goal is to show that similar economic functions can sit inside different legal structures, with different liquidity promises, balance-sheet constraints and transmission channels.

What this concept covers

• Mutual funds, money market funds, ETFs, insurers, pension funds, hedge funds and private-credit vehicles.
• Open-ended versus closed-ended structures and the implications of redemption promises.
• Liquidity transformation, leverage, margin calls and asset fire sales.
• Institutional investor mandates, benchmark pressure and portfolio constraints.
• Links between non-bank finance, banks, dealers and core funding markets.

Learning outcomes

• Distinguish the main types of non-bank financial institution by economic function and funding structure.
• Explain why daily redemptions can create stress when underlying assets are less liquid.
• Evaluate how margin calls and asset sales can amplify market moves.
• Compare the risk-bearing capacity of insurers, pension funds, funds and banks.
• Identify channels through which non-bank stress can become system-wide.

How to teach it

• Give each group one institution type and ask who provides funds, who bears losses and when cash can leave.
• Compare a daily-dealing bond fund with a long-horizon pension fund holding the same assets.
• Trace a margin call from a leveraged investor through a dealer and into a government-bond market.
• Ask students to separate investor losses from threats to market functioning.

Case-style example

NorthBridge Income Fund has €2.0 billion of assets, 35% of which normally take more than a week to sell without a material price concession. It holds 6% in cash and receives redemption requests equal to 12% of assets in two days. Students calculate the immediate cash shortfall, then compare selling the most liquid securities first with pro-rata sales across the portfolio. Both choices are defensible for different reasons. Students discover how redemption design can shift liquidity costs between exiting and remaining investors.

Where students struggle

Students often assume institutions that do not take deposits cannot create systemic risk. Ask them instead whether the institution promises liquidity, uses leverage, posts margin, holds concentrated assets or is connected to dealers and banks.

Reading and a quick check

Use Mishkin and Eakins, Chapters 20 and 21, alongside a current FSB non-bank monitoring report. Quick check: ask why an investment fund can be solvent in the ordinary sense yet still face a damaging liquidity spiral.

Where a simulation fits

Portfolio Management fits well here or in Concept 11. It lets teams manage institutional mandates and experience how portfolio construction, rebalancing and performance measures shape decisions, while the lecturer adds the separate systemic-risk lens.

Where it leads

With the major institutions mapped, students can turn to the primary markets through which companies and governments obtain financing.

Central question: How are new securities designed, priced and distributed when issuers need capital and investors need a credible risk-return proposition?

Primary markets connect financing needs to investor demand. This concept brings together intermediaries, valuation, information, underwriting, investor segmentation and allocation. It also helps students distinguish the issuer's objective of raising capital from the market's objective of pricing risk and the intermediary's role in managing the transaction process.

What this concept covers

• Primary versus secondary markets and why the distinction matters.
• Equity issuance, IPOs, follow-on offerings and debt issuance.
• Underwriting, syndication, book building, roadshows and investor feedback.
• Information asymmetry, underpricing and allocation trade-offs.
• The roles of issuers, investment banks, institutional investors and regulators.

Learning outcomes

• Explain how securities move from issuer to investors through a primary-market process.
• Compare debt and equity issuance from the issuer's perspective.
• Interpret investor demand in a book-building process.
• Evaluate the trade-off between issue price, execution certainty and aftermarket performance.
• Explain how intermediaries reduce information and coordination frictions without eliminating conflicts of interest.

How to teach it

• Begin with the funding need, not the security label.
• Build a simplified IPO order book and show how price sensitivity changes demand.
• Compare firm-commitment underwriting, best efforts and direct market access conceptually.
• Ask students to defend an issue price from the issuer, underwriter and investor perspectives.

Case-style example

GreenSpark Energy plans to issue 20 million new shares at an indicated range of €14 to €17, implying gross proceeds of €280 million to €340 million. At €16, investors indicate demand for 34 million shares, but 40% of those orders disappear if the price rises to €17. Students choose a final price and allocation policy, then explain the trade-off between proceeds and a stable aftermarket. Students discover why an oversubscribed book does not mechanically imply the highest possible offer price.

Where students struggle

Students often think the issuer simply picks a price and investors accept or reject it. Make the information feedback loop explicit: indicative demand changes price, price changes demand, and allocation decisions affect incentives and future relationships.

Reading and a quick check

Use Mishkin and Eakins, Chapters 13 and 22. Quick check: ask what evidence would justify pricing an IPO below the midpoint of a heavily oversubscribed range.

Where a simulation fits

The IPO Simulation fits directly after this concept. Teams take underwriter and investor roles, value companies, participate in roadshow and book-building stages, then make pricing and allocation decisions.

Where it leads

Once students can analyse how securities are issued, the course can turn to how institutional investors combine those securities into portfolios.

Central question: How should an institutional investor combine securities when expected return, risk, correlation and mandate constraints all matter at once?

Financial Markets and Institutions becomes more coherent when students see the demand side of markets as well as the supply side. Institutional portfolio decisions affect security demand, market prices and liquidity. This concept connects CAPM, diversification and performance measurement to the practical constraints faced by pension funds, asset managers and other institutions.

What this concept covers

• Expected return, volatility, covariance, correlation and diversification.
• CAPM, beta and the distinction between systematic and idiosyncratic risk.
• Strategic versus tactical asset allocation.
• Mandates, benchmarks, tracking risk and institutional constraints.
• Sharpe ratio, alpha, rebalancing and performance attribution.

Learning outcomes

• Explain why correlation matters alongside individual-asset risk.
• Construct and defend a simple institutional portfolio.
• Interpret beta, alpha and Sharpe ratio in context.
• Compare investment choices for different institutional mandates.
• Evaluate whether performance reflects skill, market exposure or risk taking.

How to teach it

• Start with two assets whose individual volatility is known, then change the correlation.
• Give half the class a pension mandate and half a hedge-fund mandate.
• Require a written reason for every rebalance rather than rewarding only the final return.
• Debrief performance using both absolute outcome and risk-adjusted measures.

Case-style example

Astra Pension has €100 million to allocate across three liquid assets. Expected returns are 5%, 8% and 11%, with annual volatilities of 7%, 14% and 22%. The correlation between the lowest- and highest-risk assets is 0.25. Students choose weights for a portfolio targeting at least 7% expected return and defend whether they prefer the lowest feasible risk or a higher-return mix with more volatility. Students discover that mandate fit matters as much as ranking assets by expected return.

Where students struggle

Students often treat diversification as "own more things" rather than as a covariance problem. They also overinterpret a short period of realised performance. Keep expected and realised returns visibly separate.

Reading and a quick check

Use Mishkin and Eakins, Chapters 5, 6 and 20. Quick check: ask why two risky securities can form a portfolio with lower risk than either one held alone.

Where a simulation fits

The Portfolio Management Simulation is the strongest applied fit in the course. It places teams into Hedge Fund and Pension Fund mandates and asks them to analyse companies, form portfolios, rebalance across quarters and interpret performance through measures including alpha and the Sharpe ratio.

Where it leads

The final concept asks what happens when individually rational institutions and market structures interact under severe stress.

Central question: When does a problem at one institution or market become systemic, and how should authorities and private stakeholders allocate losses while preserving critical financial functions?

A course on financial markets and institutions should finish with integration. Crises force students to connect maturity transformation, leverage, liquidity, market structure, credit losses, collateral, confidence and policy intervention. The aim is not to memorise crisis histories. It is to diagnose transmission mechanisms and evaluate competing responses.

What this concept covers

• Liquidity crises, solvency crises and the feedback loop between them.
• Runs, fire sales, collateral spirals, contagion and interconnectedness.
• Lender-of-last-resort support, market backstops and emergency liquidity.
• Resolution, restructuring, claim priority and loss allocation.
• Moral hazard, financial stability and the trade-offs in intervention.

Learning outcomes

• Distinguish an institution-specific loss from a systemic transmission mechanism.
• Map how funding stress can propagate through markets and counterparties.
• Evaluate emergency liquidity, asset purchases, guarantees and resolution tools.
• Analyse stakeholder claims and bargaining power in a distressed capital structure.
• Defend a response that balances loss allocation with continued market functioning.

How to teach it

• Use a timeline of a stress event and ask students to identify the point where the problem becomes systemic.
• Separate balance-sheet losses, funding needs and market-functioning problems.
• Assign different groups to central bank, regulator, secured creditor, unsecured creditor and equity-holder perspectives.
• Close with a decision memo that states who bears losses and why.

Case-style example

TransitCo Finance has €600 million of claims: €260 million first-lien debt, €190 million second-lien debt and €150 million equity. The business is worth €360 million in an immediate sale but could be worth €420 million as a going concern if stakeholders cooperate. Students calculate priority recoveries under liquidation, then negotiate whether first-lien lenders should accept delayed repayment to preserve the extra €60 million of going-concern value. Students discover that maximising total value and maximising one claimant's recovery can produce different recommendations.

Where students struggle

Students tend either to moralise about bailouts or to treat intervention as purely technical. Require them to state the objective, the transmission channel being addressed, who absorbs losses and what incentive problem the intervention creates.

Reading and a quick check

Use Mishkin and Eakins, Chapter 8, alongside recent research on runs and market backstops. Quick check: ask students to give one example of a solvent institution with a liquidity problem and one example of an insolvent institution temporarily supported by liquidity.

Where a simulation fits

The Debt Restructuring Simulation fits naturally at the end of the course. Students negotiate across first-lien, second-lien and equity positions in a distressed company, which makes priority, bargaining power and value preservation tangible before the lecturer reconnects the exercise to systemic-risk and resolution policy.

Where it leads

This final concept brings the course together. Students should now be able to move from market architecture and pricing through institutional balance sheets and capital-market decisions to portfolio allocation, stress transmission and resolution.

10-week course structure

A 10-week version can preserve the lifecycle by combining monetary transmission with money markets, integrating bank balance sheets with regulation, and treating non-bank institutions together with portfolio management. Do not remove primary markets or systemic risk, because these are where students connect institutions to real financing and stability decisions.

14-week course structure

A 14-week version creates room to separate central banking from term-structure analysis, deepen market microstructure, devote a full session to non-bank finance and add reflection after the major applied activities rather than simply adding more instrument coverage.

The Portfolio Management Simulation places students into institutional investment mandates rather than asking them to build a portfolio in the abstract. Teams act as either Hedge Funds or Pension Funds, analyse a universe of 25 global companies and make portfolio decisions over four quarters. The exercise uses concepts including CAPM, expected return, beta, covariance, volatility, portfolio weights, alpha, the Sharpe ratio and rebalancing.

Why it fits here

By the end of Session 10, students should be able to:

• Explain how institutional mandates change portfolio objectives and constraints.
• Use expected return, beta, volatility and covariance in portfolio decisions.
• Distinguish absolute performance from risk-adjusted performance.
• Defend a rebalance using market information and portfolio evidence.
• Connect institutional demand to security prices and market behaviour.

The simulation moves the class from calculating portfolio measures to making repeated allocation decisions for an institution with a defined mandate.

What students do

• Work in teams of roughly 3-5 students.
• Take a Hedge Fund or Pension Fund mandate with different investment objectives.
• Analyse company and market information across a universe of 25 global companies.
• Construct a portfolio using expected return, risk and diversification logic.
• Rebalance across four decision quarters as new information and outcomes emerge.
• Review alpha, Sharpe ratio and comparative results, then explain what drove performance.

Recommended course placement

• At the end of Session 10 after portfolio theory and institutional-investor teaching.
• Across two shorter classes if you want preparation and debrief separated from trading decisions.
• As a 3-6 hour workshop, or split into 4 x 45-minute, 3 x 1-hour or 2 x 1.5-hour blocks.
• Before an individual portfolio memo or short oral defence.

Knowledge students should have before the simulation

• Basic CAPM and beta.
• Expected return and volatility.
• Covariance, correlation and diversification.
• Portfolio weights and rebalancing.
• The Sharpe ratio and the distinction between return and risk-adjusted return.

Delivery format

Suggested debrief questions

• Which portfolio decision most improved or weakened your risk-adjusted result?
• How did the Hedge Fund and Pension Fund mandates change what counted as a good decision?
• Which assumption about expected return proved least reliable?
• Did diversification protect the portfolio in the way you expected?
• What did alpha and the Sharpe ratio reveal that total return alone did not?
• Which rebalance would you reverse with hindsight, and what evidence would you need before doing so?

The Debt Financing Simulation places students into a live lender-borrower negotiation around Softie, a private-equity-backed software company seeking debt financing. Borrower and lender teams analyse the company and negotiate a complete financing package rather than a single interest rate. Terms include the financing amount, interest, maturity, amortisation or repayment, seniority, security, guarantees and covenant protections.

Why it fits here

By the end of Session 8, students should be able to:

• Explain how lenders assess repayment capacity and downside risk.
• Connect credit risk to pricing, maturity and security.
• Distinguish borrower flexibility from lender protection.
• Interpret covenants and guarantees as responses to information and agency problems.
• Defend a financing structure rather than simply naming a debt instrument.

The simulation turns credit-market theory into a negotiated contract where both sides can accept a different mix of price and protection.

What students do

• Work in teams of roughly 3-5 students, with lender and borrower groups paired for negotiation.
• Review the company briefing and financial position.
• Analyse financing need, cash generation, leverage and creditor risk.
• Prepare lender or borrower negotiating priorities.
• Negotiate amount, rate, maturity, repayment, seniority, security, guarantees and covenants.
• Record an agreed package and compare the outcome with other groups in the debrief.

Recommended course placement

• At the end of Session 8 after bonds, bank intermediation, credit risk and covenant teaching.
• Inside a two-hour class if the analytical preparation is completed beforehand and the live class focuses on structuring and negotiation.
• Across two classes if you want a fuller credit analysis before negotiation.
• Before an individual credit memo that explains which terms were accepted, rejected and why.

Knowledge students should have before the simulation

• Basic debt and equity concepts.
• Cash-flow and repayment-capacity logic.
• Interest rates and credit spreads.
• Seniority, security and guarantees.
• Basic covenant purpose and lender-borrower agency problems.

Delivery format

Suggested debrief questions

• Which term created the largest disagreement between lender and borrower?
• Did the final interest rate compensate for the risks that remained after covenants and security?
• Which protection mattered most in the downside case?
• Where did the borrower trade price for flexibility?
• How would a deterioration in cash flow change the package?
• Which agreed term would you defend most strongly to a credit committee?

Simulation outcomes can strengthen assessment because they create observable decisions, negotiated terms and comparative results. They should not become an automatic score conversion. The platform records team decisions and outcomes that can support academic judgement, but it does not replace marking, moderation or evidence of individual contribution.

A practical approach is to assess the quality of the decision process rather than whether the team "won": preparation, evidence use, assumptions, trade-offs, response to new information and post-simulation reflection. Where the activity is team-based, add an individual memo, assumptions log, short oral defence or structured viva to reduce free-riding and produce attributable evidence.

Grading with the Portfolio Management Simulation

The Portfolio Management Simulation asks teams operating under Hedge Fund or Pension Fund mandates to analyse companies, build portfolios and rebalance across four quarters. Lecturers may assess:

• Quality of initial portfolio construction and mandate fit.
• Use of expected return, beta, volatility, covariance and diversification logic.
• Rationale for rebalancing decisions as information changes.
• Interpretation of alpha, Sharpe ratio and comparative performance.
• Ability to distinguish good process from favourable realised market outcomes.
• Individual post-simulation defence of one major allocation decision.

Grading with the Debt Financing Simulation

The Debt Financing Simulation asks lender and borrower teams to negotiate a complete financing package for Softie, including amount, rate, maturity, repayment, seniority, security, guarantees and covenants. Lecturers may assess:

• Credit analysis and identification of the key repayment risks.
• Coherence of opening terms and walk-away positions.
• Trade-offs between price, security, covenant protection and borrower flexibility.
• Evidence used to justify concessions during negotiation.
• Quality of the final term sheet and explanation of unresolved risk.
• Individual credit-committee memo after the team negotiation.

Grading with the IPO Simulation

The IPO Simulation uses underwriter and investor roles around three companies, moving through valuation, roadshow, book building, pricing and allocation. Lecturers may assess:

• Valuation logic and use of market evidence.
• Interpretation of investor demand during the book-building process.
• Final pricing rationale and awareness of execution risk.
• Allocation choices and treatment of different investor types.
• Ability to explain why the highest price is not always the best transaction outcome.
• Individual reflection on how new information changed the student's recommendation.

Grading with the Investment Banking Simulation

The Investment Banking Simulation is a longer, four-round exercise that integrates financial statements, DCF, financing and transaction work across a 20-year company lifecycle. Lecturers may assess:

• Quality of financial and transaction analysis.
• Consistency between valuation, financing and recommendation.
• Use of evidence in Approval Memoranda or equivalent written outputs.
• Response to role-specific incentives and new information.
• Negotiation discipline and transaction rationale.
• Individual defence of assumptions after the team activity.

Grading with the Debt Restructuring Simulation

The Debt Restructuring Simulation places teams into first-lien, second-lien and equity positions around a distressed company and requires them to negotiate against a constrained enterprise value. Lecturers may assess:

• Correct analysis of claim priority and expected recovery.
• Recognition of bargaining power and value-preservation trade-offs.
• Quality of opening position and concessions.
• Ability to distinguish liquidation value from going-concern value.
• Coherence of the final restructuring proposal.
• Individual explanation of how the student's preferred solution balances recovery, feasibility and continued operation.

For moderation, keep the same rubric across sections, preserve a sample of team outputs and individual defences, and make the boundary between group and individual evidence explicit before the activity. Where local rules require individual marks, do not infer individual contribution from a team outcome alone.