Financial Derivatives

Paper Code: 
EMF 624
Credits: 
4
Contact Hours: 
60.00
Objective: 
  • To enable students to have a detailed understanding of the special characteristics of derivatives including forwards, futures, swaps, options and others, and their relationship to the underlying cash securities.
  • To be able to use these instruments to address a wide range of trading and investment objectives.
  • To understand and be able to control the risks of financial derivatives and derivatives portfolios.
     
12.00
Unit I: 

Brief history and background of derivatives
 Evolution of Commodity, Currency, Stocks and Interest Rate Derivatives. Structure of derivative markets- Exchange traded markets and Over the counter markets, forwards, futures, options, swaps and other derivative contracts. Types of traders: Hedgers, Speculators and Arbitragers. Overview of Indian Derivatives Market.
 

12.00
Unit II: 

Mechanics of Derivatives market
Background, Exchange Structure Requirements for membership of various markets and exchanges. Exchange revenue sources and costs, roles and responsibilities of market. Contract specification, Exchange clearing, Settlement and margins system, Types of traders and types of orders, Regulation, reasons for trading: risk management, speculation and arbitrage.
 

12.00
Unit III: 

Pricing Derivatives
Investment assets v/s consumption assets, short selling, Forward price of an investment asset, valuing forward contracts, Futures price of stock indices ,forward and futures contracts on currencies, futures on commodities, interest rate futures, cost of carry model, relationship between futures and spot price (cost of carry and reverse cost of carry) difference between futures and forward price.
 

12.00
Unit IV: 

Trading Strategies involving Futures, Options and Swaps
Hedging strategies using futures, basic option trading strategies, Spreads and combination strategies, Currency and interest rate swaps.
 

12.00
Unit V: 

Option Pricing
Factors affecting option prices, upper and lower bound for option prices, put call parity, Pricing options: Black and Scholes model, binomial trees.
 

*A minimum of one case study will be discussed per unit of the syllabi.

References: 

Text Book:

  1. Future, Options and Derivatives, John C Hull, Prentice Hall of India, 2008.
  2. Robert W. Kolb, Futures, Options, and Swaps, 3rd edition, Blackwell Publishers, 2008.

Suggested readings:

  1. Robert A. Jarrow, and Stuart M. Turnbull, Derivative Securities, 2nd edition, South-Western College Publishing, 2007.
  2. Economics Times,
  3. Financial Times,
  4. NSE Report, and
  5. Derivatives Exchange reports.