Second Semester 2023-24

Course Handout (Part-II)

Date: 09/01/2024
In addition to part-I (General Handout for all courses appended to the time table) this portion gives further
specific details regarding the course.

Course No. : FIN F311/ ECON F354

Course Title : Derivatives and Risk Management
Instructor-in-Charge : SHREYA BISWAS ([email protected])

Scope and Objective of the Course:

This course introduces forwards, futures & options as securities for risk management & speculation.
Exposures to equity, currency, interest rate & commodity risk are examined. Pricing derivatives using
analytical & numerical techniques.

The objective of this course is to familiarize the students 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 swaps etc. The course has
three main objectives:
i) To understand the role of financial risk management as well as the techniques available for its
measurement in financial and non-financial corporations.
ii) To review the set of financial instruments available in modern financial markets as well as the
strategies that a firm or and an individual can use to optimize the management of the risks this
company is faced to, and
iii) To build a framework that will help integrate financial risk management into an overall corporate
strategy.

Textbooks:
1. John C. Hull & Basu Sankarshan, Options, Futures and Other Derivatives, 8th Edition, Pearson
Education.

Reference books & Cases

R1. Understanding Futures Markets by Robert W. Kolb and James A. Overdahl, 6th edition, Blackwell.

R2. International Financial Management by Cheol Eun, and Bruce G. Resnick, 6th edition, McGraw-
Hill.
R3. Derivatives, by Rangarajan Sundaram, Sanjiv Das, McGraw Hill, 1st edition
R4. Risk Management and Financial Institutions, John Hull.

1
 Lecture Notes, available on the CMS
Course Plan:
Chapter in the Text
Lecture No. Learning objectives Topics to be covered
Book
Text Book, Ch- 1 & 2.
https://

The student should be able Project Risk vs Financial www.nseindia.com/

to: understanding of various Risk, Event Risk vs Price risk; products/content/
risks and derivatives products, various derivatives products
markets, participants and derivatives/equities/
and their classification;
Module-1: structure; Evolution of the fo.htm
Introduction to futures markets. Futures Different types of market
Risk & contract specifications; participants; Function of https://
Derivatives Convergence of futures price derivatives markets; Uses and www.mcxindia.com/
Markets and to spot price; Regulatory role misuses of derivatives.
Futures markets in the futures markets; About-us
Characteristics of futures;
No. of Sessions: Accounting and taxations Trading and Settlement in the http://
6 methods in the futures
futures markets; Margins, www.ncdex.com/
markets and finally should be
able to differentiate futures Marking to Market and Open
MarketData/
and forwards contracts. Interest in the futures markets.
LiveFuturesQuotes.aspx
#

Measuring interest rates and

Module-2: zero rates; Bond pricing;
Interest rates and
The student should be able Determining Treasury zero
exchange rate to: understand the Interest rate rates; Duration and convexity; Text Book, Ch-4 and Ch
mechanism parity conditions. Theories of term structure of 5 and 6 of R2.
interest rates and yield
analysis. Foreign Exchange
No. of Sessions: 8
Markets and Rates;
Module- The student should be able Forward Markets and Text Book, ch 2 & 5.
3:Determination to: Understand how the value Contracts; Pricing and
of forward and of forward contract is Valuation of Equity; Fixed-
futures prices
determined at initiation, Income and Interest Rate
and Interest rate
Futures during life of the contract, and Forward Contracts; Evaluating
(No. of Sessions: at expiration; Calculate and credit risk in a forward
6) interpret the price and value contracts.
of forward contract on equity
stock, fixed-income security,
currency and a forward rate
agreement (FRA); Evaluate
credit risk in a forward
2
 contract, and explain how
market value is a measure of
exposure to a party in a
forward contract.

Basic Principles, Arguments

for and against hedging; Basis
Risk; Cross hedging; Stack
and roll; Hedging with
Forwards; Non Deliverable
Forwards; Currency Futures;
The student should be able
Module-4: Pricing Currency Futures;
to: Understand why the Hedging, Speculation and
Hedging futures price must converge to Arbitrage with Currency
Strategies using the spot price at expiration. Futures; Basics of Treasury
Determine value of futures bond futures and Eurodollar
Interest, futures; Short-term interest
contracts; Understand as to
Currency, why forward and futures price rate futures contracts;
Text Book, ch 3,6, and
Intermediate and long-term
Commodity, differ; understand the relation Ch 5, 7 and 9
interest rate futures contracts;
between futures prices and Hedging, Speculation,
Stock and Index
expected spot prices; and Arbitrage with commodity
Futures (No. of appreciate the difficulties in futures; Pricing of forward
Sessions: 8) pricing short-term futures and futures, Normal
contracts; Backwardation Convergence;
Basis risk, optimal hedge
ratio; Trading of Index
Futures; Pricing of single and
index futures, Risk
Adjustment, Hedging,
Speculation, and Arbitrage
with Index Futures.
Module-5: The student should be able Currency Swaps;, Interest Text Book, ch 7, 9,
to: Understand the distinction Rate Swaps; Forward Rate 10,11 and 12
Swaps
between pricing and valuation Agreement; Applications of
and Options of swaps; Understand interest
swaps, Cancellation, Pricing
rate swaps to a series of off- https://
(Mechanics, of Swaps – Interest Rate &
market forward rate www.nseindia.com/
Properties, agreements (FRAs) and a Currency Swap; Swap
products/content/
plain vanilla swap to a variant; Basics of call and put
Trading derivatives/equities/
combination of an interest rate options, Their payoffs,
Strategies, call and a put option; fo.htm
Intrinsic value and time value,
Calculate and interpret the http://
Binomial Tress, American and European
fixed rate on a plain vanilla www.cmegroup.com/
options, At the money, out of
Wiener Process interest rate swap and the company/
market value of the swap money and in the money
& Ito’s Lemma http://www.jpx.co.jp/
during its life; Calculate and options, Bounds to option
english/derivatives/
interpret the fixed rate if pricing, Arbitrage based price
3
 applicable, and the foreign
notional principal for a given
domestic notional principal on
a currency swap, and estimate
the market values of currency
swaps during their lives.
Explain and interpret the
characteristics and use of limits, Put call parity;
swaptions, and calculate the Binomial Option Pricing
payoffs and cash flows of an model, Risk Neutral valuation,
interest rate swaption; Black Scholes option pricing
and BSM Model) Understanding Option model and assumptions,
Markets and Contracts – index.html
No. of Sessions: Interpretation of Black
Variants, Payoffs, Pricing and
12 Hedging strategy; put call Scholes model; Straddle,
parity; difference between Strangle, Butterfly, Bull and
American & European Bear spread, Ratio spread,
options; General shape of the Box spread, Condor,
graph of the straddle strategy; Synthesizing with options.
Strips and straps, strangles,
the bull spread strategy; The
bear spread strategy; The
butterfly spread strategy; The
collar strategy; One and two
step binomial pricing models
and BS pricing methodology

Evaluation Scheme:

Nature of
Component Duration Weightage (%) Date & Time Compone
nt
20
Quiz-1 10%
Minutes OB
20
Quiz-2 10%
Minutes OB
Assignment 10% OB
Mid-semester
30% 11/03 - 9.30 - 11.00AM
Exam 1.5hour CB
Comprehensive
40% 06/05 FN
Exam 3 Hour CB

Chamber Consultation Hour: Mon and Wed- 4:00p.m.-4:30p.m. (with prior email appointment)
Notice: All notices will be displayed on CMS and Economics & Finance Notice Board.
Make-up policy: Make‐up will be given only on Doctor’s/Warden’s recommendation and with prior (at least
01 day before the test/exam) permission of the InstructorinCharge/Instructor.
Component Date Mode
Quiz-1 Exact syllabus and mode of exam will be informed through CMS
4
 Quiz-2 Exact syllabus and mode of exam will be informed through CMS

*Note: No make-ups for the quizzes.

Academic Honesty and Integrity Policy: Academic honesty and integrity are to be maintained by all the
students throughout the semester and no type of academic dishonesty is acceptable.

Instructor-in-Charge
FIN F311 & ECON F354