Chap 8/9

What Bonds? Discuss its characteristics

Explain the different types of bonds
Differentiate between primary market and secondary market
Differentiate between Spot rate and Forward rate
Chap 7
Discuss the various types of insurance
Difference between commercial and investment bank
Discuss about Objectives of a commercial bank.
What is Investment Banking?
Explain the Functions of commercial bank.
What are the Features & Benefits of Hedge Funds?
Chap 6
Types of Derivatives
Participants in a Derivative Market
PRODUCTS OF DERIVATIVES
FEATURES OF A FINANCIAL DERIVATIVES
Chap 5
Discuss alternate finance products and players
Who Should Invest in Thematic Funds?
type of Crowdfunding
Characteristics of Emerging Markets
Chap 4
Listing Procedure on the Exchange
Merits of listing to companies
The Securities Contract (Regulation) Act, 1956
The Reserve Bank of India (RBI)
ORGANIZATION OF STOCK EXCHANGES
Functions of Secondary Market
MEANING of SECONDARY MARKET & NATURE OF SECONDARY MARKET
Functions of Secondary Market
Securities and Exchanges Board of India (SEBI) Act, 1992
Chap 3
Explain the primary market and its principal steps of a public issue
Explain the origin and growth of stock market in India
Explain the history of stock exchanges market in India
Explain the concept of stock exchange and explain role and functions of stock exchanges
membership, organisation and management of stock exchanges
write a note on Any three market types
What is capital market and its segment /types of books
Explain various orders conditions
stock market information system
Chap 2
Explain the concept of central banking and its organization and management
Discuss the role and functions RBI
What are the functions of the central bank?
Chap 1
Explain the meaning of financial system and its functions
Explain the financial concepts
Explain the meaning of Financial Assets and its classification
Discuss the Capital market and its importance
what is money market and explain its features
explain the types of Long-Term Loan Market

Case Study 1 :
A vanilla bond is a straightforward debt security that typically offers fixed interest payments and
returns the principal amount at maturity. An investor, Jane, purchased a 10-year vanilla bond
with a face value of $1,000, an annual coupon rate of 5%, and paid $950 for it. This bond is
issued by a reputable corporation.
Key Details:
● Face Value: $1,000
● Coupon Rate: 5%
● Purchase Price: $950
● Maturity Period: 10 years
Investment Analysis:
Jane will receive annual interest payments of $50 ($1,000 * 5%). Over the bond's life, she will
receive a total of $500 in interest payments. At maturity, she will get her principal back, resulting
in a total cash inflow of $1,500. Since she purchased the bond at a discount, her yield to maturity
(YTM) will be higher than the coupon rate, enhancing her overall return.
Questions and Answers
1. What is the total interest Jane will earn over the bond's life?
o Answer: Jane will earn a total of $500 in interest payments over the 10 years.
2. How does the purchase price affect Jane's yield on the bond?
o Answer: Since Jane purchased the bond at $950, her yield to maturity will be
higher than the coupon rate of 5%, resulting in a better overall return on her
investment.
3. What is the total cash inflow Jane will receive at maturity?
o Answer: At maturity, Jane will receive $1,500, which includes $500 in interest
payments and the $1,000 principal.

Case Study 2:
A vanilla bond is a straightforward debt instrument where the issuer borrows funds from
investors and pays them periodic interest (coupons) until maturity, at which point the principal is
repaid. For example, a government issues a 10-year vanilla bond with a face value of $1,000 and
an annual coupon rate of 5%. Investors receive $50 annually, with the total return being the sum
of coupon payments and the principal at maturity.
Key Characteristics:
● Fixed interest payments
● Defined maturity date
● Generally lower risk, especially when issued by stable entities
Questions and Answers
1. What is the primary risk associated with vanilla bonds?
o Answer: The primary risk is interest rate risk; if market interest rates rise, the
price of existing bonds typically falls, making them less attractive compared to
newly issued bonds with higher yields.
2. How do inflation rates affect vanilla bonds?
o Answer: Inflation erodes the purchasing power of fixed coupon payments, which
can lead to a decline in the bond's real return. If inflation exceeds the coupon rate,
the investor effectively loses value.
3. What is a key advantage of investing in vanilla bonds?
o Answer: A key advantage is their predictability; investors receive fixed interest
payments, making them suitable for income-seeking investors who value stability
over high returns

Case Study 3:
A masala bond is a rupee-denominated bond issued in India but sold to overseas investors.
Ramesh, an investor based in London, decides to invest in a masala bond issued by an Indian
corporation for ₹1 crore, with a coupon rate of 7% and a maturity period of 5 years. The bond is
aimed at tapping into the growing Indian market while providing Ramesh with currency
diversification.
Key Details:
● Face Value: ₹1 crore
● Coupon Rate: 7%
● Maturity Period: 5 years
Investment Analysis:
Ramesh will receive annual interest payments of ₹7 lakh (₹1 crore * 7%) for five years, totaling
₹35 lakh. At maturity, he will receive his principal back, resulting in a total cash inflow of ₹1.35
crore. The currency risk is mitigated since the bond is denominated in rupees, which appeals to
Ramesh as a way to invest in the Indian economy.
Questions and Answers
1. What is the total interest Ramesh will earn over the bond's life?
o Answer: Ramesh will earn a total of ₹35 lakh in interest payments over the 5
years.
2. How does the currency denomination of the bond benefit Ramesh?
o Answer: The masala bond is denominated in rupees, which reduces currency risk
for Ramesh, allowing him to invest directly in the Indian market without exposure
to foreign exchange fluctuations.
3. What is the total cash inflow Ramesh will receive at maturity?
 o Answer: At maturity, Ramesh will receive ₹1.35 crore, which includes ₹35 lakh
in interest payments and the ₹1 crore principal.

Case Study 4:
Maharaja bonds are unique debt instruments issued by state governments in India, specifically
designed to finance infrastructure projects. Priya, an investor from Mumbai, purchases a
Maharaja bond worth ₹50 lakh with a coupon rate of 8% and a maturity period of 10 years. The
bond aims to fund the development of public transport in her city, aligning with her interest in
socially responsible investing.
Key Details:
● Face Value: ₹50 lakh
● Coupon Rate: 8%
● Maturity Period: 10 years
Investment Analysis:
Priya will receive annual interest payments of ₹4 lakh (₹50 lakh * 8%) for ten years, totaling ₹40
lakh. At maturity, she will get back her principal amount of ₹50 lakh, resulting in a total cash
inflow of ₹90 lakh. This investment not only provides steady returns but also supports local
infrastructure development.
Questions and Answers
1. What is the total interest Priya will earn over the bond's life?
o Answer: Priya will earn a total of ₹40 lakh in interest payments over the 10 years.
2. How does investing in a Maharaja bond align with Priya's values?
o Answer: The Maharaja bond funds public transport infrastructure, aligning with
Priya's interest in socially responsible investing and contributing to community
development.
3. What is the total cash inflow Priya will receive at maturity?
o Answer: At maturity, Priya will receive ₹90 lakh, which includes ₹40 lakh in
interest payments and the ₹50 lakh principal.

Derivative and Risk Management

Chap 1 introduction to derivatives

what is risk management and how to manage the risk?

explain the concept of risk management & various types of business risk

what is derivatives and its product

Explain the derivatives products.

Write a note on participants in derivatives markets

What are the functions of derivatives markets?

2 forwards and futures contracts

Write a note on forward contract

Explain the forward contract and its features

Explain the forward contract settlement

3 mechanics and properties of options

What is future contracts and terminology of options

Write a note on call option

Write a note on put option

Discuss the moneyness of options

Explain the types of options

Write a note on trading and settlement

Discuss adjustment for corporate actions on stock options

4 OPTION TRADING STRATEGIES

Straddle – Long and Short

Strangle – Long and Short

Straps and Strips

Bull Spread

Bear Spread

Butterfly Spread

Condor Spread

Calendar Spreads
Diagonal Spreads

Box Spread

Chap 5 INTRODUCTION TO OPTION

Valuation Binominal Model for valuation

The Binomial Model's Application to Price Calculation:

Black and Scholes Model

Options sensitivity to different variable

Chap 6 RISK MANAGEMENT

How Risk Management Works

How the Gamma Hedging Strategy Operates

SPECULATION

ARBITRAGE

HEDGING

Advantages of Risk Management

Disadvantages of Risk Management Process

Risk management process

Risk management structure and policies in India

Factors included Risk Management Policy

Reasons for managing derivatives risk

Types of risk in derivative trading

Chap 7 OPTIONS

Value at risk

stress testing and back testing

Chap 8 TRADING, CLEARING AND SETTLEMENT IN DERIVATIVES MARKETS

clearing and settlement in derivatives markets

Types of Traders

SEBI GUIDELINES for the regulatory framework for derivative trading

Write a note on Settlement mechanism

accounting and taxation aspect of derivatives trade

CONCEPT OF TRADING

Explain who are the clearing members and what task they play

Case Study 1:
ABC Corporation, a U.S.-based oil refiner, is concerned about rising crude oil prices affecting its
profit margins. To mitigate this risk, the company enters into a futures contract to purchase 1,000
barrels of crude oil at $70 per barrel, set to mature in six months. By locking in this price, ABC
aims to stabilize its costs despite market fluctuations.
Key Details:
● Contract Size: 1,000 barrels
● Futures Price: $70 per barrel
● Maturity: 6 months
Investment Analysis:
If crude oil prices rise to $80 per barrel, ABC saves $10,000 (1,000 barrels * $10) by securing
the lower price. If prices fall to $60, the company is still obligated to pay $70, resulting in an
opportunity cost of $10,000.
Questions and Answers
1. What is the financial benefit to ABC if oil prices rise to $80?
o Answer: ABC saves $10,000 by locking in the lower price of $70.
2. What is the risk if oil prices fall to $60?
o Answer: ABC will incur an opportunity cost of $10,000 since it must still pay
$70 per barrel.
3. What is the primary purpose of using a futures contract in this case?
o Answer: The primary purpose is to hedge against price volatility in crude oil,
stabilizing the company's costs.

Case Study 2:
John, an investor, believes that the stock of XYZ Corp., currently trading at $50, will rise
significantly over the next three months. To capitalize on this potential upside, he buys call
options with a strike price of $55, paying a premium of $2 per option. Each option allows him to
purchase 100 shares.
Key Details:
● Current Stock Price: $50
● Strike Price: $55
● Premium: $2 per option
Investment Analysis:
If XYZ's stock rises to $70, John can exercise his options to buy shares at $55, selling them for a
profit. After accounting for the premium, his total profit per option would be $1,300 [(70 - 55) *
100 - $200].
Questions and Answers
1. What happens if XYZ's stock price does not exceed $55?
o Answer: If the stock price remains below $55, John would likely let the options
expire worthless, losing the $200 premium.
2. How much profit can John make if the stock rises to $70?
o Answer: John can make a profit of $1,300 after accounting for the premium paid.
3. What is the primary purpose of purchasing call options in this scenario?
o Answer: The primary purpose is to speculate on the stock's price increase while
limiting potential losses to the premium paid.

Case Study 3 :
FarmCo, a large agricultural producer, is concerned about fluctuating wheat prices affecting its
revenue. To manage this risk, the company enters into a wheat futures contract to sell 10,000
bushels of wheat at $5.50 per bushel, set to mature in six months. This strategy aims to lock in
prices and ensure stable income despite market volatility.
Key Details:
● Contract Size: 10,000 bushels
● Futures Price: $5.50 per bushel
● Maturity: 6 months
Investment Analysis:
If the market price of wheat rises to $6.50 per bushel, FarmCo misses out on potential revenue,
as it must sell at the contracted price of $5.50. However, if the price drops to $4.50, the futures
contract protects FarmCo from losses, allowing it to sell at the higher locked-in price.
Questions and Answers
1. What benefit does FarmCo gain if wheat prices drop to $4.50?
o Answer: FarmCo benefits by securing a selling price of $5.50, avoiding losses
from the lower market price.
2. What is the opportunity cost if wheat prices rise to $6.50?
o Answer: FarmCo faces an opportunity cost of $10,000 (10,000 bushels * $1), as
it misses the chance to sell at the higher market price.
3. What is the primary purpose of using a futures contract for FarmCo?
o Answer: The primary purpose is to hedge against price volatility in the wheat
market, ensuring stable revenue and financial predictability.
Case Study 1: Hedging with Options

Situation: A cocoa farmer is concerned about falling prices before harvest. To safeguard his
income, he purchases put options, giving him the right to sell cocoa at a specific price. When the
harvest season arrives, the market price does drop significantly, but the farmer exercises his put
options, selling his cocoa at the higher strike price. This strategy protects his profit margins and
ensures financial stability despite market fluctuations.

Questions and Answers:

1. What is the main reason the farmer uses put options?

○ The farmer uses put options to protect against the risk of falling cocoa prices.
2. How does this strategy impact the farmer's financial planning?
○ It provides a safety net, allowing the farmer to plan his finances with more
certainty and confidence.
3. What would happen if cocoa prices rose instead?
○ If prices rose, the farmer could choose not to exercise the options, losing only the
premium paid for them.
4. What factors could affect the value of the put options?
○ Factors include changes in market price, time until expiration, volatility, and
market demand for cocoa.

Case Study 2: Speculating with Futures

Situation: An investor believes that gold prices will increase and decides to buy gold futures
contracts at the current market price. If the price of gold rises, the investor can sell the contracts
for a profit. However, if gold prices fall, the investor is obligated to buy at the higher contract
price, which could lead to significant losses. Ultimately, the investor sells the contracts before
expiration as gold prices surge, realizing a substantial gain.

Questions and Answers:

1. What motivated the investor to buy gold futures?

○ The investor aimed to profit from the anticipated increase in gold prices.
2. What risks are associated with trading futures contracts?
○ The main risks include the potential for significant losses if the market moves
against the investor’s position.
3. How does leverage play a role in futures trading?
○ Futures allow investors to control large positions with a smaller capital outlay,
amplifying both potential gains and losses.
4. What might the investor consider when deciding when to sell the futures contracts?
 ○ The investor should consider market trends, economic indicators, and the
potential for price volatility.

Case Study 3: Currency Swaps

Situation: A U.S.-based multinational company has a loan in euros but generates most of its
revenue in dollars. To manage currency risk, the company enters into a currency swap with a
European firm, exchanging dollar payments for euro payments. This allows both companies to
align their cash flows more closely with their respective revenues, minimizing exchange rate risk
and stabilizing their financial operations.

Questions and Answers:

1. What is the main benefit of entering into a currency swap?

○ The primary benefit is to reduce currency risk by matching cash flows in the same
currency.
2. How does this strategy enhance financial stability for both companies?
○ It allows both companies to predict cash flows more accurately, leading to better
financial planning and reduced risk exposure.
3. What risks might arise from this arrangement?
○ Risks include fluctuating exchange rates that could affect the value of the
payments exchanged.
4. How can changes in interest rates impact the currency swap?
○ Changes in interest rates can alter the attractiveness of the swap, potentially
leading to renegotiation or affecting the companies' borrowing costs.

Case Study 4: Interest Rate Derivatives

Situation: A corporation with a variable-rate loan fears rising interest rates will increase its
borrowing costs. To manage this risk, the corporation enters into an interest rate swap,
exchanging its variable-rate payments for fixed-rate payments with a financial institution. This
strategy stabilizes the corporation's cash flows and allows it to budget more effectively, even if
interest rates rise.

Questions and Answers:

1. What is the main purpose of the interest rate swap for the corporation?
○ The main purpose is to convert variable-rate payments into fixed-rate payments to
mitigate the risk of rising interest rates.
2. How does this decision affect the corporation's budgeting process?
○ It provides certainty in cash flows, making it easier for the corporation to plan and
allocate resources.
3. What are the potential downsides of using an interest rate swap?
○ The downside includes the risk of missing out on lower rates if market rates
decrease after entering the swap.
4. How can economic conditions impact the effectiveness of this strategy?
○ Economic fluctuations, such as unexpected interest rate changes, can alter the
benefits of the swap and affect the corporation’s overall financial health.