Course Title Financial Derivatives and Risk Management Credits 3
Course Code MGT 3106 Course category OE L-T-P 2-1-0
Version 1.0 Approval Details ACM Learning Level BTL-5
Derivatives have proven to be immensely useful in the management of financial
COURSE risk. This can be seen through the exponential growth both in terms of volume and
DESCRIPTION: variety of products which are being introduced rapidly, FDRM course provides a
broad introduction to the Options, Futures, Forward, Swaps and Interest Rate
Markets and outlines the different ways in which they can be used in
managing risk.
This course focuses on the conceptual and analytical aspects of derivatives. It
will introduce the students to the complex world of financial derivatives. This
course will provide an in-depth understanding of the financial derivatives and
will help them understand how to use them for the management of risk.
The course focuses on the structure and operation of derivative markets
(options, forward contracts, futures, swaps and other derivatives), The
valuation of derivatives, Hedging strategies using derivatives, and Applications
of derivatives in the areas of risk management, portfolio insurance, and
financial engineering.
COURSE The basic idea is to understand how certain instruments are
OBJECTIVES: derived from out of underlying assets and how they go about
reducing risks without sacrificing returns many times.
To understand how the financial derivatives can be used to implement
basic market risk management strategies, appropriate for corporate
applications
To be able to solve basic problems requiring the ability to price
derivative instruments and hedge market risk based on numerical data
and current market conventions
To see that the students have acquired the basic skills required for
pricing financial derivatives, including familiarity with some central
techniques, namely, no-arbitrage pricing, the binomial model, and
the Black-Scholes model
Understand the application of option pricing theory in the area of financial
engineering and corporate finance.
To understand the Option strategies that go to reduce risk and to be able
to utilize the concept of Greek letters in trading in options.
Upon completion of this course, the students will be BT Level
able to:
At the end of this course students will be BTL LEVEL
able to:
1
Acquire knowledge of how forward contracts, BTL 01, BTL 02
futures contracts, swaps and options work
Understand the basic types of derivatives, their payoff BTL 01, BTL 02
functions, their developments, and the economic roles
they play in the financial markets
Be able to describe and explain the fundamental BTL 02, BTL 03
Course features of a range of key financial derivative
Outcome instruments
Construct, and evaluate basic risk management and BTL 04, BTL 05
trading strategies using derivatives
Apply the concepts and design strategies for trading in BTL 04, BTL 05, BTL
derivative markets 06
CO, PO and PSO Mapping
COURSE PROGRAM OUTCOMES (PO)
S. No OUTCOME
S (CO) PO PO PO PO PO PO PO PO PO PO PO PO PS PS0 PS
1 2 3 4 5 6 7 8 9 10 11 12 O1 2 O3
3 2 3
1 CO-1 3 - - 1 - - - - - - - -
3 3 3
2 CO-2 3 2 - - - - - - - -
3 3 3
3 CO-3 3 2 - - - - - - - -
3 2 3
4 CO-4 2 3 - - - 2 - - - - - -
3 2 3
5 CO-5 3 3 - - - - 2 - - - - -
1: Weakly related, 2: Moderately related and 3: Strongly related
2
Number
Unit Outline Teaching Schedule of
Sessions
Introduction to Derivatives
Define a derivative and differentiate between exchange-traded and over-the
counter derivatives; Define a forward contract. Differentiate among the basic
characteristics of forward contracts, futures contracts, options (calls and 2
1
puts), Discuss the purposes of derivative markets
Mechanics of Futures Markets
Describe the specifications of futures contracts. Explain how the futures
contracts are bought and sold. Explain the role of initial margin, maintenance
margin, and settlement in futures trading. Describe the procedures for
2 3
settling futures contracts. Describe various hedging strategies using futures
Explain the meaning of basis risk. Describe Stock index futures
Understanding rolling the hedge forward
Determination of forward & futures prices
Explain the concept of continuous compounding and discrete compounding.
Explain the factors that affect the price of a forward contract. Calculate the
3 3
forward price of a forward contract using the cost of carry model. Compute
the value forward contracts
(Qualitative and quantitative)
Mechanics of Options
Describe call and put options. Distinguish between European and American
options; Describe the different option positions. Define the concept of money
ness of an option. Calculate and interpret option payoffs, intrinsic value and
time value, and explain their relationship. Describe the specifications of a
4 8
options contract. Pricing of Stock options Determine the lower bound and
upper bound for option prices. Explain put–call parity theorem. Discuss early
exercise of calls and puts. Explain the effect of dividend on option prices.
Binomial trees Explain the concept of binomial trees. Create a one step and
two step binomial models. Calculate option prices for European and
1
American options using the binomial model
Pricing of Options and Its Trading Strategies.
Explain various option trading strategies that can be created by combining
two or more options; Create a bull spread, a bear spread, and a butterfly
spread. Create a strip, strap and straddle. Determine and interpret the value at
expiration, profit, maximum profit, maximum loss, breakeven underlying
price at expiration, and general shape of the graph for the major option
Strategies.
5 10
The Black- Scholes-Merton model: Explain the assumptions underlying the
Black–Scholes–Merton model and their limitations. Compute option prices
using the Black-Scholes pricing formula Learn the use of the Black-Scholes
options pricing calculator Calculate Implied volatilities
The Greek letters: Explain what each of the Options Greeks means and
explain its characteristics. Explain the delta of an option and demonstrate
how it is used in dynamic hedging. Explain the gamma effect on an option’s
price and delta and how gamma can affect a delta hedge.
Swaps.
Describe the characteristics of swap contracts and explain how swaps are
terminated; Explain how an interest rate swap is created. Explain how IRS
6 4
can be used to convert a floating-rate loan to a fixed-rate loan and vice versa;
Explain how currency swaps are structured. Calculate the Value of currency
swaps
2
TOPIC DELIVERY PLAN & ASSESSMENT PLAN
RECOMMENDED READINGS:
Options, Futures, and other derivatives” by John C. Hull and Shankaran Basu, 7/e Pearson
Publications
Essential Reading
Don M Chance, An Introduction to Derivatives and Risk Management, Thomson, South- Western
David A Dubofsky & Thomas W miller Jr. Derivatives - Valuation and Risk Management,
Oxford University Press.
Rangarajan K Sundaram, and Sanjiv R Das, Derivatives - Principles and Practice, McGraw Hill
Education (India) Pvt Ltd, New Delhi.
R Madhumathi and M Ranganatham, Derivatives and Risk Management, Dorling Kindersley
(India) Pvt. Ltd., Pearson Education.
Web resources
www.moneycontrol.com
www.nseindia.com
www.bseindia.com
www.equitymaster.com
www.marketwatch.com
www.valueresearchonline.com
www.bloomberg.com
Recommended Digital library / MOOC Course:
1. https://www.coursera.org/learn/pricing-options-with-mathematical-models
2. https://www.coursera.org/specializations/financialengineering
Assessment Method (Mapped with CO’s) 3
Course Outcomes to be Assessed
SL Assessment Description Weightage
No. method of in Marks
assessment
CO1 CO2 CO3 CO4 CO5
method
Duration
1 DSE During
Semester
Exam
2 CP Class
Participation
3 AS Assignment
4 MP Mini project
with
presentation
5 ST Surprise test
to check the 25 √ √ √ √ √ Throughout the
basics semester
6 TC Tutorial
Class 20 √ √ √ √ √ Throughout the
semester
7 CA Case
Analysis
8 AT Attendance
5 √ √ √ √ √
9 SEE Semester
End- 50 √ √ √ √ √
Examination
4
1
