Course Outline

Financial Derivatives PGDFS (2010 -2012) COURSE FACILITATOR Name of Faculty- Prof. Pushpendra Singh email- Pushpendra.singh@iilmgsm.ac.in Contact details- +91 8527914913 IILM Graduate School of Management
Greater Noida

COURSE OVERVIEW: This course aims primarily to acquaint participants with the basic logic of different types of financial innovations (derivatives, their processes, products & institutions) and develop a framework for financial engineering. The primary focus of the course is on analysing the various derivative instruments keeping in view the domestic as well as global scenario. COURSE TOPICS:

1. 2.
3. 4. 5. 6. 7. 8. 9. 10. 11.
LEARNING OUTCOMES:

Overview of Derivatives Fundamentals of Financial Futures Forward Rate Agreements Interest Rate Futures Stock Index Futures Swaps Options The Basics Option Pricing Options Hedging Strategies Options Trading Strategies Foreign Exchange Derivatives

Economies today are undergoing the demolition of their rigid structures, cumbersome rules and procedural aspects, and building a higher degree of integration with the rest of the world. This integration, unequivocally, brings in new opportunities by extending trade beyond the geographical boundaries of the Nation. At the same time it presents risks. The risk management demands new set of products and competencies. The economic rationale behind the introduction of derivatives in any economy is risk management and efficient price discovery. Fundamentally, derivatives are risk management products. Worldwide, these markets are reflecting unprecedented growth in volumes. In fact, in many countries, volumes in derivatives markets are many times the volumes in the underlying cash market. The exploitation of these products' value generating capabilities by the market participants require sound understanding of product nuances and their strategic use. This course will essentially help the students accomplish that.

PRE- REQUISITES:

It is required for the students to have a reasonable understanding of capital markets, investments and fundamentals of quantitative techniques. BOOKS AND REFERENCES: There are many good books in Financial Derivatives & Financial Engineering. The one closest to the spirit of this course (although more complete) and to the instructors way of thinking is

Financial Derivatives', S.S.S. Kumar, II edition, PHI learning Pvt. Ltd.. Other References: There are plenty of good literature on derivatives which are quite helpful in having a thorough insight of the same. A comprehensive list (although not complete in true sense) is as follows: 1. 2. 3. 4. 5. 6. 7. 8. Derivatives: Valuation and Risk Management --- Dubofsky, David A; Miller, Thomas W (Oxford University Press) Financial Engineering --- Marshall, John F; Bansal, Vipul K (Prentice Hall of India) Financial Derivatives --Financial Derivatives: Theory, Concepts and Problems --- Gupta, S L (Prentice Hall of India) Fundamentals of Futures and Options Markets, 4e --- Hull, John C (Pearson Education) Derivatives & Risk Management, 1e --- Varma, J R (Tata McGraw- Hill Publishing Company) Risk Management and Financial Institutions, 1e --- Hull, John C. (Pearson Education)

Credit Derivatives, 1e --- Chacko, George; Motohashi, Hideto; Sjoman, Anders; Dessain, V (Pearson Education) 9. Derivatives and Financial Innovations --- Bansal, M., Bansal, N. (Tata McGraw- Hill Publishing Company)

10. Economics and Mathematics of Financial Markets ---- Cvitanic, Jaksa; Zapatero, Fernando (Prentice Hall) 11. Futures and Options --- Edwards, F. R.; Ma, C W (McGraw Hill International) 12. Interest Rate Option Models: Understanding, Analysing and Using Models for Exotic Interest Rate Options ---- Rebonato, R (John Wiley and Sons) 13. Understanding Futures Markets ---- Kolb, R W (Prentice Hall of India) 14. Financial Engineering: Derivatives & Risk Management --- Cuthbertson, Keith; Nietzsche, Dirk (John Wiley & Sons) 15. Implementing Credit Derivatives: Strategies and Techniques for Using Credit Derivatives in Risk Management --- Nelken, Israel (McGraw HILL) 16. Financial Derivatives in Theory and Practice

--- Hunt, P J; Kennedy, J E (John Wiley & Sons) 17. Risk Management & Derivatives --- Stulz, Rene M (Cengage Learning Pvt. Limited) 18. The Oxford Guide to Financial Modeling: Application for Capital Markets, Corporate Finance, Risk Management & Financial Institutions) --- Ho, Thomas S Y; Lee, Sang Bin (Oxford University Press) Journals/Magazines: 1. 2. 3. 4. Chartered Finance Analyst Journal of Derivatives Journal of Financial Risk Management Economist

Online Resources: www.sebi.gov.in www.amfiindia.com www.sharekhan.com www.capitalmarket.com www.nsdl.co.in www.icicidirect.com www.bseindia..com www.bondmarkets.com www.nse-india.com
ASSESSMENT CRITERIA:

S.No 1 2 3

Parameter Class Test etc Referred article analysis/Term paper/Case analysis/Presentation End Term

Weightage 20% 20% 60%

Refereed Article Analysis: Students would identify an article on Financial Engineering in consultation with the faculty. After this, they are expected to submit a review which should not exceed 500 words. Term Paper: Students would choose a topic from the course outline in consultation with the faculty and prepare a term paper highlighting the contemporary issues involved.

SESSION PLAN: Session 1-2 3-4 Topic An Introduction to Derivatives market Fundamentals of Financial Futures Pre-Reading Chapter 1, FDSSS Kumar Chapter 3, FDSSS Kumar Activity Discussion Discussion & Numerical exercises Discussion & Numerical exercises Discussion & Numerical exercises Discussion & Numerical exercises Presentation/T est/ Discussion Discussion & Numerical exercises Discussion Discussion & Numerical exercises Discussion & Numerical exercises Discussion & Numerical exercises Presentation/T est/Discussion Discussion & Numerical exercises Presentation/T est/Discussion

Forward Rate Agreements

Chapter 4, FDSSS Kumar

6-7 8-9 10-11 12-13 14 15-17 18-19 20-21 22-23

Interest Rate Futures Stock Index Futures Case Study/Class Test/Guest Lecture (Futures) Swaps Options The Basics Option Pricing Options Hedging Strategies Options Trading Strategies Case Study/Class Test/Guest Lecture (Options) Foreign Exchange Derivatives

Chapter 5, FDSSS Kumar Chapter 6, FDSSS Kumar Chapter 7, FDSSS Kumar Chapter 8, FDSSS Kumar Chapter 9, FDSSS Kumar Chapter 10, FDSSS Kumar Chapter 11, FDSSS Kumar Chapter 12, FDSSS Kumar -

24-26 27 Case Study/Class Test/Guest Lecture (Foreign Exchange Derivatives)

Session Details Session Pre-Reading 1-2 Chapter 1 FD-SSS Kumar PHI Issues for Discussion in Class Evolution & Types of Derivatives, Reading the derivative page, Participants, Economic Benefits of Derivatives, Exchange Traded Financial Derivatives in India, Trading & Types of Orders, Contract Size, Multiplier, Lot Size & Tick size, Clearing House, Margins Forward contract, Pricing forward and future contract, Value of a forward contract, Future & Forward prices, Uses of futures & forward contracts, Hedging with futures and forwards Learning Outcome Students would be familiar with the fundamental concepts of Derivatives trading Additional Reading Chapter 1 D & FI Bansal & Bansal TMH Chapter 1 D & RM Dubosfsky & Miller Oxford

3-4

Chapter 3 FD-SSS Kumar PHI

Students will learn the key differences between a forward and a future contact and how to manage risk with the help of these contracts

Chapter 2,3 & 4 D & FI Bansal & Bansal TMH Chapter 5-7 D & RM Dubosfsky & Miller Oxford Chapter 3-4 D & RM Dubosfsky & Miller Oxford Chapter 4 D & RM Dubosfsky & Miller Oxford

Chapter 4 FD-SSS Kumar PHI

How market makers Students would be quote FRA rates, FRAs in familiar with the Hedging working and risk management through Forward rate contracts. Short term interest rate futures, Pricing a Treasury bill future, Implied Repo rate, Long term futures contract, Application of interest rate futures Profit & losses in stock index futures, Settlement of index futures/Individual securities, Stock index future pricing, Index futures arbitrage, Investment applications, Adjusting the Beta of a portfolio, Tailing the hedge. Students would understand the practical application of Interest rate futures in minimizing payables risk. Students would learn the hedging and investment applications of index futures in managing market risk, further they will learn how to adjust the Beta of the portfolios according to the anticipated market direction

6-7

Chapter 5 FD-SSS Kumar PHI

8-9

Chapter 6 FD-SSS Kumar PHI

Chapter 8 D & RM Dubosfsky & Miller Oxford

10-11

Case Study/Class Test/Guest Lecture Introduction & terminology of Swaps, Mechanics of interest rate swaps, Economic motives of swaps, Pricing and valuation of swaps, Valuing a swap, Uses of interest rate swaps, Exiting from swap contract. Option price quotations, Payoffs from options, Moneyness of options, Settlement of option contracts, Option premium, Put price relationships, Put-Call parity.

Broader understanding of Forwards and futures Students would learn the innovative product of derivatives market in terms of swaps.

12-13

Chapter 7 FD-SSS Kumar PHI

Chapter 11-13 D & RM Dubosfsky & Miller Oxford

14

Chapter 8 FD-SSS Kumar PHI

Students would learn the degree of flexibility in options, difference between options buyer and options seller. Options pricing.

Chapter 5 D & FI Bansal & Bansal TMH Chapter 14 D & RM Dubosfsky & Miller Oxford Chapter 7 D & FI Bansal & Bansal TMH Chapter 17 & 18 D & RM Dubosfsky & Miller Oxford Chapter 19 D & RM Dubosfsky & Miller Oxford Chapter 8 & 10 D & FI Bansal & Bansal TMH

15-17

Chapter 9 FD-SSS Kumar PHI

Fundamental determinants of options price, Option pricing methods, Binomial option pricing model, Black-Scholes option pricing model.

Student would understand the intricacies of pricing the options with various models.

18-19

Chapter 10 FD-SSS Kumar PHI

Option price sensitivities, Delta. Gamma, Theta, Vega, Rho, Delta hedging. Building block of derivatives, Long stock, Short stock, Long call, short call, Long put, short put, Option trading in combination with the underlying, Directional strategies, Volatility strategies, Horizontal spreads, Ratio and back spreads. Case Study/Class Test/Guest Lecture

Students would learn the hedging techniques through options. Students would be able to understand the various strategies that are possible with options and their combinations.

20-21

Chapter 11 FD-SSS Kumar PHI

22-23

Broader understanding of Options as risk management tool

24-26

Chapter 12 FD-SSS Kumar PHI

FOREX rates, Direct vs Indirect Quote, Bid and Ask rate, FOREX risks, Rupee forwards, Pricing of currency forwards, FOREX futures, Currency swaps, FOREX options. Case Study/Class Test/Guest Lecture

Students would learn how to minimize the FOREX asset and liability risk.

27

Practical understanding of minimizing the FOREX risk.