Financial Derivatives

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Course Title: Financial Derivatives

Course Code: FIBA303
Credit Units: 3
Course Level: UG
Course Objectives:
Finance has evolved as an exciting discipline in terms of innovations in the recent past. The objective of the course is on the use of mathematical models on
financial instruments and knowledge of innovative tools in terms of financial derivatives. Financial Derivatives start where financial analysis ends.
Pre-requisites: The prerequisites are knowledge of Financial Management and Security Analysis.
Course Learning Outcomes:

• Remembering the new developments in the financial markets
• Understanding financial innovations in equity and debt market.
• Analyzing the price of options, futures and swaps using various models.
• Applying the theoretical models and analyzing the deviations from the real market
• Evaluating the decisions in derivatives market with special reference to various cases
• Creating a profitable strategy using combination of stocks, options or futures
Course Contents/Syllabus:
Weightage (%)
Module 1: Introduction to Financial Derivatives 15
Descriptors/Topics
Introduction to derivative trading, Characteristics of derivatives, Underlying assets (Equity Bonds/loans, Foreign Currency, and Commodity),
Importance of derivatives as an investment option, introduction to types of derivatives; Participants in derivatives market (Hedgers, Speculators,
Arbitrageurs). Evolution of Derivative markets in India.
Module 2: Forwards & Futures 15
Descriptors/Topics
Forward contracts: Limitations of forward markets, Differences between forwards and futures, Futures terminology, pricing of futures contract,
Introduction to currency futures, Interest rate futures, Treasury bond futures, Eurodollar futures, commodity futures, Index futures & Stock
Futures (Hedging, speculation and arbitrage).
Module 3: Options Fundamentals 20

Descriptors/Topics
Terminology - call, put, writer, buyer, premium, intrinsic value, time value, expiry date, settlement date, strike price, ATM, OTM & ITM, Options
positions(payoff graphs), Types of Stock options, futures options vs. spot options, Options on stock Indices, currencies & futures, Warrants &
executive stock options, Exotic options
Module 4: Principles of trading & Hedging with Options 20
Descriptors/Topics
Option Valuation: The BS-Merton Model (Numerical on BS model, assumption application and criticism), Trading strategies - Option trading
using bull and bear spreads (payoff graphs)
Module 5: Swaps 15
Descriptors/Topics
Terminology: - LIBOR, MIBOR, Swap basis, Interest rate swaps, Currency swaps: Various types of swaps & features, Introduction to
Swaptions.
Module 6: Recent Developments 15

Descriptors/Topics
New Derivative contracts including Credit Derivatives, Weather Derivatives, Energy Derivatives, etc. Role of derivatives in the economic
meltdown of 2007 - 2008, Major Derivative mishaps in the world including The Barrings Bank disaster, The Sumitomo corporation scandal, the
Swiss Bank scam.
Pedagogy for Course Delivery:

The course is covered by adopting a combination of lecture methods, class presentation by groups of students, self-study sessions, online e-content. Group
Assignment & Presentation to build their own analysis ability. Case studies will be taken up to illustrate real life situations. Also, the Web Resources such as
further references, related links, books including e-books, research papers & journals will be part of the instructions in this course. Various questions in the form
of question banks, MCQs, short and long questions and answers, assignment etc. will be part of continuous assessment in this course.
Assessment/ Examination Scheme:

Theory L/T (%) End Term Examination
100% 50
Theory Assessment (L&T):

Continuous Assessment/Internal Assessment End Term
Examination
Components (Drop CT P HA Attendance
down) 50
Weightage (%) 20% 15% 10% 5% 50%
Mapping Continuous Evaluation components/PSDA with CLOs
Bloom’s Remembering Understanding Applying Analysing Evaluating Creating

Level >
Course CLO1 CLO2 CLO3 CLO4 CLO5 CLO 6
Learning
Outcomes
Assessment
type/PSDA
CT ✓ ✓ ✓ ✓
HA1 ✓ ✓ ✓
HA2 ✓ ✓ ✓
P ✓ ✓ ✓ ✓
Text & References:
Text & References:
Text:
Hull, John C, An introduction to futures and options markets, Second Edition Prentice Hall of India
References:
Gupta, S .L., Financial Derivatives Theory, Concepts and Problem 2005, Prentice - Hall, India
Edwards, F. R. and Ma, C. W. 1992, Futures and Options, McGraw-Hill International.
Rebonato, R. Interest Rate Option Models: Understanding, Analyzing and Using Models for Exotic Interest Rate Options, John Wiley and Sons.
Kolb, R. W. Understanding Futures Markets, Prentice Hall of India.
Paul Glasserman, Monte Carlo Methods in Financial Engineering, Springer.
Riccardo Rebonato, Volatility and Correlation, 2nd edition, Wiley, 2004.
Damiano Brigo and Fabio Mercurio, Interest Rate Models - Theory and Practice, 2nd edition, Springer, 2006.
Riccardo Rebonato, Modern Pricing of Interest-Rate Derivatives: The LIBOR Market Model and Beyond, 1st edition, Princeton University Press, 2
Philipp J. Sconbucher, Credit Derivatives Pricing Models, 1st edition, Wiley, 2003.
Investment Science by David G. Luenberger

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’

L T P/S SW/F TOTAL

Course Title: Financial Derivatives

Course Learning Outcomes:

Module 3: Options Fundamentals 20

Module 4: Principles of trading & Hedging with Options 20

Module 6: Recent Developments 15

Pedagogy for Course Delivery:

Assessment/ Examination Scheme:

Theory Assessment (L&T):

Weightage (%) 20% 15% 10% 5% 50%

Mapping Continuous Evaluation components/PSDA with CLOs

Bloom’s Remembering Understanding Applying Analysing Evaluating Creating

Text & References:

Text & References:

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