Course title: Derivatives and Risk Management

Course code: PPM 123 No. of credits: 2 L-T-P distribution: 28-0-0 Learning hours: 28
Pre-requisite course code and title (if any):
Department: Department of Business and Sustainability
Course coordinator(s): Course instructor(s):
Contact details:
Course type: Elective Course offered in: Semester III
Course description
Risk is all pervasive. For business the various kinds of risk relate to price, interest rates, foreign exchange rates, credit
etc. Of late tactical management of these risks has gained prominence especially with advent of derivative products.
The course concerns with tactical management of these risk through investment in financialassets. More specifically,
the course will deal with the pricing and use of financial derivatives, including options, forwards, futures, swaps and
credit derivatives as risk management tools. Financial derivatives are used by institutions as well as investors,
sometimes to hedge (reduce) unwanted risks, sometimes to take on 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 incidents that had already happened in the markets.
Course objectives
The objective of this course is to familiarize the participants with the various instruments available for risk
management. It covers rather simpler instruments such as options, futures, swaps, and credit derivatives. Besides
discussing the pricing of these instruments and hedging principles the course would also aim at introduction of some
complex instruments such as options on futures and swapsetc.
Course contents
Module Topic L T P
1 Forwards and Futures, Trading and Settlement, Margins, 2 0 0
Marking to Market, Open Interest
Commodity Futures
Hedging, Speculation, Arbitrage with commodity futures, Pricing of forward and
2 futures, Normal Backwardation 2 0 0
Convergence, Basis risk, optimal hedge ratio
Chapter 3
Currency Forwards and Futures
Foreign Exchange Markets, and Rates, Hedging with Forwards, Non-Deliverable
3 Forwards, Currency Futures, Pricing Currency Futures, Hedging, Speculation, and 2 0 0
Arbitrage with Currency Futures
Chapter 5
Stock and Index Futures
4 Trading of Index Futures, Pricing, Risk Adjustment, Hedging, Speculation, and 2 0 0
Arbitrage with Index Futures
Chapter 4
Options
5 Basics of call and put options, Their payoffs, Intrinsic value and time value, American 2 0 0
and European options, At the money, out of money and in the money options, Bounds
to option pricing,
 Arbitrage based price limits, Put call parity
Chapter 8 & 9

Option Pricing
Binomial Option Pricing model
6 Chapter 10 2 0 0
Chapter 12 & 13
Option Pricing
7 Risk Neutral valuation, 2 0 0
Black Scholes option pricing model and assumptions,
Interpretation of Black Scholes model.
Option Trading Strategies
8 Straddle, Strangle, Butterfly, Bull and Bear spread, Ratio spread, Box spread, 2 0 0
Condor, Synthesizing with options
Chapter 12
Exotic Options
Introduction (definitions, payoff and applications) to Forward Start option, Digital
9 Option, Chooser Option, Barrier option, Shout option, Asian option, Compound 2 0 0
option
Chapter 13
Option Greeks (Option Sensitivities) Delta,
10 Theta, Gamma, Delta Hedging Chapter 11 2 0 0

Swaps
Forward Rate Agreement, Currency Swaps, Interest Rate Swaps, Applications of 2 0
11 swaps, Cancellation andValuation of Swap 0
Chapters 6 and 7

Interest Rate Derivatives (Black’s

Model and applications) Caps, Floor,
12 Collars, 4 0 0
Swaptions, Options on Bonds,
Options on futures, Interest rate futures
Chapter 15
TOTAL 28 0 0
Evaluation criteria
 Test 1: Class Participation10%
 Test 2: Project30%
 Test 3: Written Test20%
 Test 4: Written test40%
Learning Outcomes:
On successful completion of the course students will be able to:
1. Recognize the role of derivatives in financial risk management.
2. Demonstrate critical thinking, analytical and problem-solving skills in the context of derivatives pricing and hedging
practice.
3. Evaluate alternative risk management strategies and tactics.
4. Demonstrate an understanding of pricing forwards, futures and options contracts.
Pedagogical approach
The course will be delivered through lectures and discussion of case studies, practical in Finance Lab, research papers
and articles.

Materials:

Derivatives and Risk Management, By Rajiv Srivastava, Oxford University Press, 2nd Edition
Other references
1. Options, Futures, and Other Derivatives, 7thEdition, By John C Hull, (PearsonEducation)
2. Futures Options andSwaps, By Robert Kolb (Blackwell Publishing)
3. FinancialDerivatives, By Keith Redhead (Prentice Hall of India)
4. Derivatives; AnIntroduction, By Robert A Strong (Thomson South Western)
3. Bhalla, V.K. (2012). Investment Management. New Delhi: Sultan Chand.
4. Wimott, P. (2012). Quantitative Finance. Wiley & Sons.
5. Jarrow, R. & Stuart, T. (1995). Derivative Securities. South Western.
6. Chance, D.M.,& Brooks, R. (2008). Derivatives and Risk Management Basics. Cengage Learning India.
7. Pliska, S. (1997). Introduction to Mathematical Finance. Wiley-Blackwell Publishing.
8. www.ncdex.com for details on commodity derivatives in India
9. www.nse-india.com for stock-based derivatives
10. http://www.theponytail.net/DOL/DOL.htm for derivatives-based notes

Additional information (if any)

Modules
Sessions plan as above would be followed with following module objectives:
An overview of risk and derivatives:
The objective of the session is to draw distinction between various kinds of risks that a firm is exposed to. Some of
these risks are manageable with derivative instrument. The session on Introduction to derivatives is intended to
provide an overview of derivatives, their characteristics and misconceptions about them.
Forwards and Futures:
These sessions are aimed at introducing the terminology of forwards and futures, their applications of hedging fro
variety of underlying assets such as commodities, currencies, stocks and interest rates. This would also cover the
pricing principles and methods of trading, settlement etc. Separate sessions for commodities, currencies and stock
indices would deal extensively with the examples of hedging, speculation and arbitrage.
Options:
Sessions on options are aimed at developing an understanding about the complex nature of the derivative. The
objective is to familiarize the participants with the various ways to value options. Hedging using options would be
discussed in details with suitable real life applications. Trading strategies with options would deliberate upon how the
combination of options can be used to achieve the desired risk profiles of different classes of investors. Sessions on
exotic options would concentrate on how the parameters of options can be modified to suit the individual needs of
 hedging and cost associated with them.
Swaps and Interest Rate Derivatives:
These sessions are useful for the sectors such as banking, construction and infrastructure that are sensitive to broad
economic factors and interest rate structures and changes in them. The tools of managing the interest rate risk would
be introduced with emphasis on swaps and interest rate futures.
Student responsibilities
All students are expected to read the assigned readings prior to the class. Students are expected to analyze the case
following the ‘discussion questions’. All students must maintain full attendance and do timely submission of
assignments. Full Class Participation is expected from all students.

Prepared by:

CourseReviewer:
MrP.S.Narayan, Ecoeye, Social and Community Initiatives, Wipro
Mr Brij Sethi, Ecoeye, Social and Community Initiatives, Wipro
Mr Rakesh Sharma, Strategy & Business Development, Philips Electronics India Limited
Mr Pawan Deep Singh, Strategy & Business Development, Philips Electronics India Limited.