MASTER OF BUSINESS ADMINISTRATION SEMESTER III SESSION: 2010 2011 (FINANCE GROUP) SUBJECT: MBA/3105/F FINANCIAL DERIVATIVES

SUBJECT INSTRUCTOR: S. M. Mishra

Introduction of the Subject: Derivatives occupy a very significant place in the field of finance and are virtually driving the global financial markets of the day. Several markets of the world have witnessed a phenomenal rise in trading derivative instruments over the past three decade. In India, however, this has been so for about last over a decade only. Derivatives are seen to perform the economic functions of price discovery, assisting market completion and providing a hedging mechanism, and they are of value to all, be it small investors, corporations or fund managers. With the world embracing the derivatives trading on a large scale, the Indian market obviously cannot remain aloof, especially after liberalization has been set to motion. Derivatives trading have been prevalent for long in India in form of teji, mandi, nazrana, fatak, etc. but these concepts dont exactly match with the present day concepts of derivatives. This transition calls for a proper understanding of derivatives and the knowledge and appreciation of the mechanism and risks associated with it. This is what this subject proposes to address in greater details. Objectives of the Course: 1. To understand growth and development of derivatives markets 2. To acquire knowledge about different types of derivatives along with their distinctive characteristics 3. To understand the mechanism of derivatives market 4. To understand trading tricks of derivatives and its ability to hedge risk 5. To value different derivatives for being able to advise its trade 6. To understand its use in risk management 7. To give to the participants of the course a feel of derivatives trade in India Outcomes: Pursuing this course thoroughly and rigorously would lead its participants become competent and confident player of the derivatives market either as buyer-seller or as consultant or as fund manager of their respective corporations. They should even be able to design and to innovate derivatives to strengthen its market. Pedagogy: It would include lecture by subject teacher and presentations by participants for clarity of underlying principles and practice followed by numerical oriented case analysis and exercises in form of mock derivatives exchange for obtaining the true feeling of this market. Interaction with derivatives brokers, derivatives traders, fund managers and online access to BSE shall further supplement the participant in building his / her competence and confidence about financial derivatives.

LESSON PLAN MASTER OF BUSINESS ADMINISTRATION SEMESTER III SESSION:2009 2010 (FINANCE GROUP) SUBJECT: MBA/3105/F FINANCIAL DERIVATIVES

SUBJECT INSTRUCTOR: S. M. MISHRA

2.

Derivatives An overview* Concept, Characteristics, Bases of Classification, Major types ExchangeTraded & OTC

(Ch.-1/pp.-1-18; 2 JCH1), (Ch.1/pp.-7-8; TVS)

3.

Derivatives India**

in (Ch.-1/pp.-2-7 1 and Ch.-14/pp.Evolution and Historical 297-303; TVS), (Ch.-31/pp.Development 785-808; VKB), (Ch.-1/pp.-15-6; NDV) Market Concept, Characteristics, Merits and Demerits (Ch.-1/pp.-2-5; JCH2) 1

4.

Forward Contracts

5.

Future Contracts

(Ch.-1/pp.-5-6; 2 JCH2), (Ch.Concept, Characteristics, Types, Merits and 33/pp.-855-88; VKB) Demerits (Ch.-1/pp.-14-5; 1 (Ch.Concept and JCH2), 35&36/pp.-992Characteristics of Other 43; VKB) Types (Ch.-1/pp.-10-4; 2 (Ch.Traders, Intermediaries JCH2), 1/pp.-10-4; and Regulatory NDV) Framework

6.

Other Derivative Securities

7.

Type of Traders

Unit Total 10 Periods

UNIT NO. II

TOPIC TOPICS WITH DETAIL TEXT AND NO. OF REMARKS, NO. COURSE OUTLINES REFERENCES PERIODS IF ANY ALLOTTED 8. Futures Market Mechanics of (Ch.-2/pp.-192 40; JCH2 & pp.21-44; JCH1), (Ch.-2/pp.-2125; TVS) 1

9.

Forward and Futures

(Ch.-3/pp.-4168; JCH2) Distinction between Forward and Future Contracts Related Mechanism Terms, (Ch.-2/pp.-1940; JCH2)

10.

Marking to Market

CASE 1& 2: Numerical (to be distributed in class room) 11. The Use of Futures for (Ch.-4/pp.-703 92; JCH2), (Ch.Hedging Concept and Types of 3/pp.-47-71; (Ch.Hedging, Arguments For JCH1), 37/pp.-944-64; & Against Hedging, VKB), (Ch.Hedging Model 2/pp.-17-20; CASE 3 & 4: Numerical (to TVS), (Ch.be distributed in class room) 2/pp.-59-73; NDV) (Ch.-8/pp.-181- 3 JCH1), Concept, Types, 204; (Ch.-32/pp.Valuation of Options 809-54; VKB), CASE 5: Numerical (to be (Ch.-4/pp.-139distributed in class room) 87; NDV) Options Market Properties of Stock Option Prices Swaps (Ch.-8/pp.-16784; JCH2) 1

Unit Total 09 Periods

III

12.

13. 14.

(Ch.-6/pp.-125- 3 60; JCH2), (Ch.Concept, Types, 34/pp.-889-901; Valuation of Swaps VKB), (Ch.CASE 6: Numerical (to be 8/pp.-193-207 distributed in class room) and Ch.-9/p.210; TVS) Interest Rate Futures Concept, Characteristics and Types (Ch.-6/pp.-129- 2 68; JCH1), (Ch.5/pp.-125-7; TVS)

15.

Unit Total 09 Periods

UNIT NO. IV

TOPIC TOPICS WITH DETAIL TEXT AND NO. OF REMARKS, NO. COURSE OUTLINES REFERENCES PERIODS IF ANY ALLOTTED 16. Trading Strategies Involving (Ch.-9/pp.-185- 4 9; JCH2 & Ch.Options Strategy Involving Single 10/pp.-223-40; (Ch.Option and Stock, Spreads and JCH1), 3/pp.-109-32; Combination Strategies NDV) (Ch.-32/pp.2 818-21; VKB), Evolution, Features and (Ch.-12/pp.Model 234-66; JCH2) CASE 7 & 8: Numerical (to be distributed in class room) Black-Scholes Option Model (Ch.-32/pp.2 816-18; VKB), Meaning, Features and (Ch.-10/pp.Model 200-15; JCH2) CASE 9: Numerical (to be distributed in class room) Binomial Model Options on Stock Indices (Ch.-13/pp.1 267-98; JCH2), (Ch.-5/p.-129; TVS) 3

17.

18.

19.

Unit Total 09 Periods

20.

Currencies Contracts

and

Futures (Ch.-5/p.-128; TVS)

Concept, Types 21. General Approach to Pricing (Ch.-3/pp.-61-7; Derivatives Securities JCH2) Concept, Formulae and Methods for Known Income / Yield CASE 10 & 11: Numerical (to be distributed in class room) 22. Interest Rate Securities Derivative (Ch.-22/pp.508-36; JCH2) 2 Unit Total 08 Periods 3

Concept, Characteristics and Types

TOPICS BEYOND SYLLABUS AND RELEVANT FOR PROPER APPLICATION OF THE THEORY AND PRACTICE OF THIS SUBJECT A. B. Risks in Derivative Trading Estimating Volatilities and Correlations (Ch.-6/pp.-198210; NDV) 2 During Extra Periods / Hours

(Ch.-17/pp.3 372-91; JCH2), (Ch.-19/pp.461-80; JCH1)

*Necessary to lay foundation for discussion on this subject **Shifted from Unit V as found appropriate in sequence there Note: Topics in bold are the course contents as prescribed in the syllabus by the SGB Amravati University, the affiliating university. TEXT BOOKS RECOMMENDED: 1. Options, Futures and Other Derivatives, John C. Hull, 6th Edition, Prentice-Hall of India, New Delhi, 2005 (JCH1) 2. Options, Futures and Other Derivatives, John C. Hull, 5th Edition, Prentice-Hall of India, New Delhi, 2003 (JCH2) 3. Derivatives, T. V. Somnathan, Tata McGraw-Hill Publishing Company Ltd., New Delhi, 1998 (TVS) 4. Futures and Options, N.D. Vohra and B. R. Bagri, Tata McGraw-Hill Publishing Company Ltd., New Delhi, 1998 (NDV) 5. Investment management Security Analysis and Portfolio Management, V. K. Bhalla, 11th Edition, S. Chand & Company Ltd., New Delhi, 2004 (VKB) SUGGESTED READINGS (References): 1. TAXMANNS Financial Management, Ravi M. Kishore, Taxmann Allied Services Pvt. Ltd., New Delhi, 1999, Relevant Chapter 2. Financial Derivatives An Introduction to Futures, Forwards, Options and Swaps, Redhead, Prentice-Hall of India, New Delhi, 2003 3. The Icfai Journal of Applied Finance, The Icfai University Press, Hyderabad, Relevant Articles 4. The Economic Times, Daily Newspaper, Stock Index Page of different issues 5. www.bseindia.com *****