Course Outline FD (1.5)

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Course Outline: Financial Derivatives – I

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Credit:1.5 , Core Course
Area: Finance
Program: PGDM-B&FS
Term: III Academic Year: 2020-22
_______________________________________________________________________
Instructor(s) Name Faisal Nazir Zargar
Room no. 207
Email [email protected]
Phone (Extn no.) +91-11-47194121
Meeting Hours As per the mutual convenience
______________________________________________________________________
1. COURSE DESCRIPTION
This course will focus on the analytics of financial derivatives and their application in risk
management. The course will deal with the pricing of commonly used financial derivatives
such as forwards & futures, options, and swaps. The course will also emphasize on the use of
financial derivatives as risk management tools. Financial derivatives are used by institutions as
well as by investors, sometimes to hedge (reduce) unwanted risks, and sometimes to take an
additional risk motivated by views regarding future market movements. Through this
perspective, the course will also highlight the uses and abuses of financial derivatives with
respect to the various financial market incidents that have taken place in the past.

2. COURSE OUTCOMES (COs)

After going through the course, the students would be able to:

Course Outcome 1 (CO1): Explain the various types of financial derivatives.

Course Outcome 2 (CO2): Apply the tools and techniques for pricing and valuation of basic
derivative instruments (forwards & futures, options, and swaps).
Course Outcome 3 (CO3): Make use of financial derivatives for risk management/hedging
and speculation.

Course Outcome 4 (CO4): Apply the Monte Carlo simulation techniques.


3. MAPPING OF THE PROGRAM OUTCOMES (POs) AND COURSE OUTCOME
(COs)

Course Outcomes (COs)

Program Outcomes (POs)


CO1 CO2 CO3 CO4

PO1: Student should be able to write well organized and


grammatically correct business reports and letters.

PO2: Student should be able to make effective oral presentations.

PO3: Student should be able to demonstrate critical thinking skills


by understanding the issues with a strong focus on banking and
financial services, evaluating alternatives on the basis of multiple 3 3 3 3
perspectives and presenting a solution including conclusions and
implications
PO4: Student should be to demonstrate problem solving skills by
understanding and defining the problem related particularly to
banking and financial services, analyzing it and solving it by 3 3 3 3
applying appropriate theories, tools and techniques.

PO5: Student should be able to illustrate the role of responsible


leadership in management.
PO6: Student should be able to identify social concerns and
ethical issues in management.

PO7: Students should be able to identify challenges faced by 3


banks and financial institutions in the global business
environment.

PO8: Student should be able to take decisions in the global


business environment with special focus on banking and financial
institutions.

4. PEDAGOGY

The course will be primarily taught through a combination of class lectures, MS excel
worksheets, discussions, numerical problems, case analysis, assignments, and term-long
project. The class discussion will involve the readings assigned for the class, which may
include book chapters, articles, and cases. You are expected to have done all the assigned
reading and to actively participate in these discussions. The missed quizzes shall not be made
up under any circumstances and you will receive zero points.
5. COURSE EVALUATION COMPONENTS (CECs)
Component 1: Quizzes (30%)
The quizzes will be compulsory and will be spread across the entire course. If any student
misses any quiz, no makeup quiz will be given later.

Component 2: Class participation (10%): Students will be evaluated for their active
contribution in class discussions, relevance of contribution and overall conduct during classes.

Component 3: Project (30%)


A term long group-project will be given to the class to apply the tools & techniques they learn
in the class in real-life scenario.

Component 4: End Term (30%)


End term exam will include all the topics that will be covered during the 10 sessions. The exam
will assess subject understanding through application of concepts to analyze real life business
situations.

6. MAPPING BETWEEN COs, POs and CECs

Course Evaluation Components (CECs)


COs POs
CEC1 CEC2 CEC3 CEC4
CO1 PO3 ✓ ✓ ✓
CO2 PO3 ✓ ✓ ✓
PO4
CO3 PO3 ✓ ✓ ✓
PO4
PO7
CO4 PO3 ✓ ✓ ✓
PO4

7. RESOURCES
7.1 Textbook

John C. Hull, Fundamentals of Futures and Options Markets, Pearson. Latest Edition (9 th
Edition). ISBN: 9789352865635 (Hull, hereafter)

7.2 Reference Books

John C. Hull and Sankarshan Basu, Options, Futures, and Other Derivatives, 8th edition,
Pearson
7.3 Online References (if any)
• nseindia.com
• isda.org
Tentative Class Schedule
(Additional readings, cases, and articles may be assigned as required)
Session Topics Pedagogy Readings
1-2 Introduction to Financial Lecture, Discussion, Chapters 1, 2
Derivatives Problem-solving, Excel- (Hull)
• Mechanics of Forward & modelling
Futures Market
• Forward and Futures Contracts
• Over-the-Counter Market
• Hedgers, Speculators, and
Arbitrageurs
• Forward and Futures: A
comparison
• Specifications of a Futures
Contract
• Understanding Market Quotes
• Long Futures & Short Futures
Payoff
3-4 Pricing of Forward and Futures Lecture, Discussion, Chapters 3, 5
• Margining in Futures Problem-solving, Excel- (Hull)
• Short Hege, Long Hedge modelling
• Cross Hedging
• Hedge Ratio
• No Arbitrage Pricing of Futures
• Cost-of-Carry and Convenience
Yield
5-6 Mechanics of Option Markets Lecture, Discussion, Chapters 9,
• Types of Option Problem-solving, Excel- 10 (Hull)
• Option Positions Modelling
• Specifications of an Option
Contract
• Call & Put Payoffs
• No Arbitrage Pricing of Option
• Risk-Neutral Approach

7-8 Option Pricing Lecture, Discussion and Chapters 13,


• The Black-Scholes-Merton Problem-solving 19 (Hull)
Model
• Implied Volatility
• Volatility Smiles, Volatility
Term Structure, and Volatility
Surfaces
9-10 Mechanics of Interest Rate Lecture, Discussion and Chapter 7
Swaps Problem-solving (Hull)
• Forward Rate Agreement
• Interest Rate Swaps
• The Comparative-Advantage
Argument
• Introduction to CDS

8. ACADEMIC INTEGRITY & CLASS RULES

a) Plagiarism is the use of or presentation of ideas, works that are not one’s own and which are
not common knowledge, without granting credit to the originator. Plagiarism is unacceptable
in IMI and will invite penalty. Type and extent of penalty will be at the discretion of the
concerned faculty.

b) Cheating means using written, verbal or electronic sources of aid during an examination/ quiz/
assignment or providing such assistance to other students (except in cases where it is expressly
permitted by the faculty). It also includes providing false data or references/list of sources which
either do not exist or have not been used, having another individual write your paper or
assignment or purchasing a paper for one’s own submission. Cheating is strictly prohibited at
IMI and will invite penalty as per policies of the Institute.

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