208. FINANCIAL DERIVATIVES

(Credits: 4)

Objective:

This course aims at providing an in-depth understanding of financial derivatives in terms

of concepts, structure, instruments and trading strategies for profit and risk management.

MODULE I : Introduction to Derivatives

Unit 1: Definition – Types – Participants and functions – Development of

exchange traded derivatives – Global derivatives markets – Exchange traded vs.

OTC derivatives markets – Derivatives trading in India – L.C.Gupta Committee-

J.R.Varma committee-Requirements for a successful derivatives markets (5)

Unit 2: Futures: Introduction – Futures terminology – Key features of futures

contracts – Futures vs. Forwards – Pay off for futures – Equity futures in India –

Index futures – Stock futures – Futures trading strategies – Hedging – Speculation

– Arbitrage – Spread trading. (5)

Unit 3: Options: Introduction – Options terminology – Types – Options pay off –

Equity options contracts in India – Index options – Stock options – Options

trading strategies – Hedging – Speculation – Arbitrage – Straddle – Strangles –

Strips and straps – Spread trading. (5)

MODULE II: Pricing of Futures and Options

Unit 1: The cost of carry models for stock and index futures – Cash price and

futures price , arbitrage opportunity.

(5)

Unit 2: Factors affecting options pricing – Option pricing models – Binomial

pricing model – The Black and Scholes Model – Pricing of index options

(5)

Unit 3: Sensitivity of option premia (Delta, Gamma, Lambda, Theta, Rho)

(5)

MODULE III: Trading Clearing and Settlement of Options and Futures

Unit 1: Futures and options trading system – Trader workstations – contract

specification-specification for stocks and index eligibility for trading-

Charges (5)

Unit 2: Clearing entities and their role –clear mechanism-adjustment for

corporate actions- Open position calculation

(5) Unit 3; Margining and settlement mechanism-Risk Management-SPAN-

Mechanics of SPAN-Overall portfolio margin requirement (5)

MODULE IV: Interest Rate, Credit, Currency and weather Derivatives

Unit 1: Interest rate options-caps-floors-collars-swaptions-hedging-credit

derivatives-credit risk management (5)

Unit 2: Currency futures and options-trading strategies

(5)

Unit 3: Weather, energy and insurance derivatives-Real options-Derivative

mishaps-lessons. (5)

Suggested Readings:

1. John Hull, Options, Futures and other Derivatives, Pearson Education

2. S.L.Gupta, Financial Derivatives, Prentice Hall.

3. Parameshwaran, Financial Derivatives, Mcgraw Hill.

4. D. C. Patwari, Options and Futures- An Indian Perspective, Jaico Publishing

House.

5. Punithavati Pandian, Security Analysis and Portfolio Management, Vikas

Publishing House.

6. Prasanna Chandra, Security Analysis and Portfolio Management, Tata McGraw

Hill.

7. Sanjeev Aggarwal, A Guide to Indian Capital Markets, Bharat Publishing.

8. NCFM Derivatives (Dealers) Module

9. NCFM Currency Derivatives Modules