Options, Futures and Swaps (Creidt: 03)

Course Outline

Options, Futures and Swaps (Creidt: 03)

Faculty: Munmun Mohanty

OBJECTIVE

This course is intended to provide a holistic view of derivative securities and risk management using them. This course takes a modern approach to the subject, discusses the traditional as well as emerging models focusing on intuitive analysis but not at the expense of essential math and gives a succinct appraisal of the derivative environment in India and the world. The course starts with a discussion on the necessity of evolution of financial derivatives as risk management tools and their growth. The forwards and futures are discussed exploring the difference between the two, the settlement mechanism, pricing and hedging. The focus then shifts to Options, their payoffs and pricing. There will also be a detailed discussion on options market in India. The trading and hedging strategies using options will also be discussed to impart an in depth knowledge on risk management to students. Towards the end the students will learn the role of Swaps in managing risk.

REQUIREMENTS FOR THE COURSE:

Following is the classification of the activities or events related to the subjects. Failure to follow the process would make the subjects challenging.

Pre-class : Activities as assigned and Readings from the chapters of issued text book, Reference book and other sources mentioned in session plan, Failing to do so would disqualify the student to attend the session at the discretion of the faculty.

In the class : In addition to regular and prompt attendance, Interaction through questions and comments is essential. Importantly end of the session interaction relevant to the topic would be highly appreciated.

Post class : Complete the assignments or activities before the next session, which would be the opportunity to apply the class room concepts in the real world. Failing to do so would make the student disqualified to attend the next session at the discretion of the faculty.

Note: In order to discourage late coming and promote class room discipline, student attendance will be taken at the beginning of the session. However those who come late to the class can attend the session but will not get attendance and cannot claim for the same.

Tentative Session Plan :

• Derivatives defined
• Basic financial derivatives
• Growth of derivatives

• Forwards vs. Futures
• Specification in futures contract
• Settlement
• Types of trader

• Long, Short and Cross hedging
• Arguments for and against hedging
• Basis risk

• Forward price of investment asset
• Valuing forward contracts
• Forward vs. Futures price
• Futures on commodities
• The cost of carry

• Mechanics of interest rate swaps
• Currency swaps
• Valuation

• Types of options
• Option positions
• Margins
• Options in Indian Market

• Strategies involving a single option and a share
• Spreads
• Combinations

• One step binomial model
• Risk neutral valuation
• Two step binomial
• American options

• Log normal property of stock prices
• Volatility
• Risk neutral valuation
• Black-Scholes option pricing formula

• Whether derivatives
• Energy derivatives
• Insurance derivatives

Pedagogy :

Interactive class lectures, numerical problem solving, short case analysis, and other assigned readings. Assignments will be given to students on a regular basis after class sessions, and students would be expected to come prepared with the assignments in the next class.

Readings:

a)Text: Derivatives- Principles and Practice, Sundaram and Das, McGraw Hill Publications

b)Reference:Option, Futures and other Derivatives, J.C. Hull and S. Basu, 7th Edition, Pearson Publication

c)Derivatives and Risk Management, J.R. Verma, Tata McGraw Hill Publications

d)Keith Redhead, “Financial Derivatives – An Introduction to Futures, Forwards, Options and Swaps”, 1st Edition 1997, Prentice Hall of India

e)Class ppt printouts

f)Readings as and when made available in class