SCHOOL OF COMMERCE, FINANCE AND ACCOUNTANCY

Financial Securities and Derivatives (COA632L)

CIA-I

TOPIC: MOOC Course report

SUBMITTED TO:

Prof. Aby Alex William

SUBMITTED BY:
SUHANA TANWAR- 22111142

6BCOMB

DATE OF SUBMISSION
20/01/2025
 Introduction to Derivatives and Options
"Introduction to Derivatives and Options" provides a thorough understanding of derivatives and
options, starting with foundational concepts and gradually progressing to practical strategies. The
course is divided into two key sections: Basics of Derivatives and Options Trading, covering both
theoretical knowledge and real-world applications.

Derivatives
Derivatives are financial contracts whose value depends on an underlying asset, such as
stocks, commodities, or market indices. These instruments allow market participants to
manage risks, speculate on price movements, or hedge their investments.
For example, the value of a futures contract for Reliance Ltd. depends on factors like the
stock's price, the time remaining until the contract expires, and the market's volatility.

Futures
Futures are agreements to buy or sell an asset at a predetermined price on a specified future
date.
Example of Futures Contract:
Mr. Y believes the price of ITC, currently ₹400, will increase. He buys a futures contract with
a strike price of ₹400 and an expiry date set for the last Thursday of March 2025.

Outcome on Expiry:
1. If the stock price drops to ₹350: Mr. Y incurs a loss of ₹50 per share, resulting in a
total loss of ₹80,000 for 1600 shares.
2. If the stock price rises to ₹470: Mr. Y makes a profit of ₹70 per share, totaling
₹1,12,000.
3. If the stock price remains ₹400: Mr. Y breaks even with no profit or loss.

Positions in Futures Trading:

 Long Position: A trader is optimistic (bullish) about the asset's price and enters a
contract to buy.
 Short Position: A trader expects the asset's price to fall (bearish) and enters a contract
to sell.
 Margins in Futures Trading:
 Initial Margin: The upfront amount deposited with a broker to open a trading position.
This acts as collateral.
 Maintenance Margin: The minimum balance an account must hold after a trade is
initiated. If the balance falls below this, the broker issues a margin call, requiring
additional funds or selling securities to meet the margin requirement.

Bid-Ask Spread
The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid)
and the lowest price a seller is willing to accept (ask). A narrower spread indicates higher
market liquidity and efficiency.

Volume and Open Interest

Volume can be defined as the total contract traded on a particular date. Open Interest: Open
Interest can be defined as contracts that are yet to be settled, which means they are in open
positions as of now. The second section dives deeper into options, which are one of the most
widely used types of derivatives. This part starts with an introduction to options and their use
in both speculation and hedging. I found the explanation of long-call and long-put options
helpful, as it clearly showed how traders can profit from price movements. The section also
covered short-call and short-put options, which are strategies that can generate income but
come with higher risks, especially for beginners.

Options
Options can be defined as an agreement where the buyer/seller has the right to buy or sell a
particular share. Suppose you believe that the stock price of XYZ Ltd., currently trading at
₹500 per share, will rise in the next month. To benefit from this potential increase without
purchasing the stock outright, you buy a call option with a strike price of ₹520, expiring in
one month, by paying a premium of ₹10 per share. If, by the expiration date, the stock price
rises to ₹550, you can exercise the option to buy the stock at ₹520 and immediately sell it at
the market price of ₹550, making a profit of ₹20 per share (₹550 - ₹520) minus the premium
of ₹10, resulting in a net profit of ₹10 per share. Conversely, if the stock price remains below
₹520, you would not exercise the option and would lose only the premium paid (₹10 per
share), as exercising the option would result in a loss. This demonstrates how a call option
provides a way to profit from upward price movements while limiting potential losses to the
premium paid.
Long Call Option
A long call means buying a call option, giving the buyer the right (but not the obligation) to
buy an underlying asset at a specific price (strike price) before the option expires.
When to Use:
When you expect the price of the underlying asset to rise.
Example:
Stock XYZ is trading at ₹500. You believe the price will increase, so you buy a call option
with:
Strike Price: ₹520
Premium: ₹10 per share
Expiry: One month

Long Put Option

A long put means buying a put option, giving the buyer the right (but not the obligation) to
sell an underlying asset at a specific price before the option expires.
When to Use:
When you expect the price of the underlying asset to fall.
Example:
Stock ABC is trading at ₹300. You believe the price will decrease, so you buy a put option
with:
Strike Price: ₹280
Premium: ₹8 per share
Expiry: One month

Short Call Option

A short call means selling (writing) a call option, giving the buyer the right to buy the
underlying asset from you at a specific price.
When to Use:
When you expect the price of the underlying asset to remain stable or decrease.
Example:
Stock XYZ is trading at ₹500. You sell a call option with:
Strike Price: ₹520
Premium: ₹15 per share
 Expiry: One month

Short Put Option

A short put means selling (writing) a put option, giving the buyer the right to sell the
underlying asset to you at a specific price.
When to Use:
When you expect the price of the underlying asset to remain stable or increase.
Example:
Stock ABC is trading at ₹300. You sell a put option with:
Strike Price: ₹280
Premium: ₹10 per share
Expiry: One month

Course Objective
This course, "Introduction to Derivatives and Options," aims to equip participants with a
clear understanding of the fundamentals of derivatives, their practical applications, and how
they are utilized in financial markets. The objectives include:
1. Understand the Basics of Derivatives:
Learn the foundational concepts of derivatives, their types (futures, options,
swaps, and forwards), and their critical role in global financial markets.
Explore how derivatives derive their value from underlying assets like stocks,
commodities, or indices.
2. Learn Practical Applications:
Bridge the gap between theoretical knowledge and real-world applications by
understanding how derivatives are used for speculation, hedging, and
arbitrage.
3. Analyze Key Market Metrics:
Understand essential financial terms such as fair value, trading volumes, and
open interest, which are vital for interpreting market behavior and trends.
4. Evaluate Risk Profiles of Financial Instruments:
Assess the risk characteristics of linear assets (e.g., stocks) and derivative
instruments like futures and options.
Develop strategies to minimize financial risks while optimizing returns.
Course Structure
The course is structured into two comprehensive sections to provide a logical flow of
learning:
1. Basics of Derivatives
This section introduces participants to the foundational concepts of derivatives and their
market behavior. Topics include:
a) Introduction to Derivatives:
Definition, types, and underlying assets.
Role of derivatives in financial markets, including risk management and price
discovery.
b) Positions in Futures, Bid-Ask Spread:
Understanding long and short positions in futures contracts.
Analyzing the bid-ask spread as an indicator of market liquidity and trading
costs.
c) Fair Value, Volumes, and Open Interest:
Exploring how fair value is calculated and its significance in derivatives
trading.
Understanding the concepts of trading volumes and open interest for tracking
market activity and sentiment.
d) Margin Concept:
Explanation of initial and maintenance margins and their role in ensuring
market stability.
Overview of margin calls and their implications for traders.
2. Options: The Fundamental Building Blocks
This section focuses on the essential components of options trading, laying the groundwork
for advanced applications. Topics include:
a) Introduction to Options:
Basics of call and put options and their significance in trading and hedging.
Differences between American and European options.
b) Long Call and Long Put:
Strategies for leveraging long calls (bullish outlook) and long puts (bearish
outlook).
Risk and reward profiles for these strategies.
c) Short Call and Short Put:
 Exploring the income-generation potential of short options and the associated
risks.
Practical examples of when to use short call and short put strategies.

Duration of the Course

The course is designed to be concise yet impactful, with a duration of 1 hour, ensuring that
participants can quickly grasp the key concepts and apply them effectively.

Concepts Learned
By the end of the course, participants will have gained:
 A fundamental understanding of derivatives:
Insights into futures and options, their mechanics, and their role in financial
markets.
 Introduction to option pricing techniques:
Basics of how market variables like volatility, time to expiry, and underlying
asset prices influence option pricing.
 Overview of hedging strategies:
How derivatives can be used to mitigate risk and stabilize portfolios.
 Financial market metrics:
Familiarity with key metrics like fair value, open interest, and trading volumes
for analyzing derivative markets.

Practical Applications
The course emphasizes hands-on learning by demonstrating real-world scenarios:
1. Speculation, Hedging, and Arbitrage:
Learn how derivatives are employed to speculate on price movements, hedge
against unfavorable price changes, and exploit price discrepancies across
markets.
2. Option Strategies for Risk Management:
Practical use of long calls, long puts, short calls, and short puts to manage
financial risks.
Understanding which strategies work best under various market conditions.
3. Analyzing Risk Profiles:
 Evaluate the potential risks and returns of different financial instruments.
Assess how market conditions impact derivative positions and adjust strategies
accordingly.

Skills Acquired
Participants will leave the course with a robust skill set, including:
 Market Data Analysis:
Ability to interpret bid-ask spreads, trading volumes, and open interest for
informed decision-making.
 Risk Management:
Proficiency in using derivatives to create risk-hedging strategies and minimize
exposure to market fluctuations.
 Practical Application of Options:
Mastery of option strategies like long calls, long puts, short calls, and short
puts to align with specific financial goals.
 Strategic Decision-Making:
Confidence in developing and implementing strategies to achieve speculative
gains or protect existing portfolios in volatile markets.

Evidence of Completion:
Personal Opinion
The course provides an excellent foundation for understanding derivatives and options,
offering clear explanations that make complex financial concepts more approachable. The
modules are well-structured, covering the essential components of derivatives like futures,
forwards, and options, as well as their practical applications in financial markets.
One of the course's standout features is its ability to simplify challenging topics. The
instructor delivers the material in a straightforward manner, using accessible language, which
is particularly beneficial for beginners unfamiliar with the jargon of financial markets.
Furthermore, the course strikes a fine balance between theory and practice, helping learners
not only grasp the theoretical underpinnings of derivatives but also understand their real-
world utility.

Areas of Improvement
While the course effectively introduces the basics of derivatives and options, there is room
for enhancement to maximize the learning experience.
1. Short Assessments:
Incorporating short assessments or quizzes at the end of each module would help
reinforce the concepts covered. These assessments could include multiple-choice
questions, scenario-based problems, or short case studies to test the learner's
understanding. Immediate feedback on these assessments would provide an opportunity
for learners to identify and address gaps in their knowledge.
2. Real-World Examples:
While the course provides a general overview of derivatives, adding examples from
recent financial market events would make the content more engaging and relevant. For
instance, using scenarios from market crashes, corporate hedging strategies, or arbitrage
 opportunities would illustrate how derivatives are applied in real-time, helping learners
connect theoretical knowledge with actual market behavior.

Challenges Faced
Despite the course's strengths, a few challenges were encountered during the learning
process.
1. Supplementary Resources:
Certain topics required additional clarification beyond what was provided in the
course. To fully understand these areas, it was necessary to pause and consult
supplementary resources like financial textbooks, articles, and YouTube tutorials.
While these resources were helpful, it highlighted the need for the course to include
more in-depth explanations for some concepts.
2. Engagement:
The lack of interactive elements, such as live discussions or interactive simulations,
made it harder to stay fully engaged, particularly during longer sections. Introducing
features like live Q&A sessions, discussion forums, or interactive trading simulations
could significantly enhance learner engagement and retention.

Application of Knowledge
The knowledge gained from this course can be applied across various domains of finance,
making it a valuable asset for academic and professional pursuits.
1. Portfolio Management:
Understanding options and derivatives is crucial for analyzing risk and return in
portfolio management. For instance, using options to hedge against downside risk or
to enhance portfolio returns through strategic positions can add value to academic
projects focused on portfolio optimization. The ability to evaluate different financial
instruments and their impact on portfolio performance is a key takeaway from this
course.
2. Equity Research:
In equity research, derivatives knowledge can be instrumental in analyzing a
company’s risk exposure and the hedging strategies employed by firms. For example,
understanding how companies use futures contracts to manage commodity price risk
or currency fluctuations can provide deeper insights into their financial stability and
operational efficiency. This course equips learners with the tools needed to interpret
such strategies effectively.
3. Investment Banking:
For those pursuing a career in investment banking, the course’s content on derivative
pricing and hedging strategies is highly applicable. Professionals in this field often
design financial products or suggest hedging solutions tailored to clients’ specific
market exposures. The understanding of how derivatives are structured and priced is
fundamental for creating value-added solutions in this domain.