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RMD-Major 3 - Term IV - 2020-21-Course Outline-Final Submitted
RMD-Major 3 - Term IV - 2020-21-Course Outline-Final Submitted
COURSE DESCRIPTION
Risk management is crucial for optimal portfolio management. Derivatives used in financial
risk management have become increasingly important in the world of finance. The notional
turnover of derivatives market has grown exponentially across the globe due to sharp
volatility in the prices of different assets like; commodities, currencies and securities.
Therefore, a careful study of derivative securities has become very important, for a financial
analyst. Derivatives can be used for hedging i.e. to mitigate the risk of economic loss arising
from changes in the value of the underlying asset. Alternatively, derivatives can also be used
by investors for speculation i.e.to increase the profit arising if the value of the underlying
moves in the direction they expect.
The purpose of this course is to provide a comprehensive analysis on the features of
forwards, futures, options and swaps and to offer a framework within which all derivatives
can be valued and hedged.
Unit-I-Introduction to derivatives
2 sessions
Introduction to derivatives, uses of derivatives, types of risks, risk management, approaches
to risk management and risks in derivatives trading- International derivatives market,
derivatives market in India, operations of derivatives exchanges-trading, clearing and
settlement.
Readings: Chapter #1 and 2
Unit II: Forward Contracts 2 sessions
Introduction to forward contracts, Forward Rate Agreements (FRAs) , Forward Foreign
Exchange Contracts , Using forward contracts to manage risk , Determining forward prices
and. Valuing a forward contract after origination ,Forward Exchange rates ,Forward Interest
Rates.
1
Readings: Chapter #3, 4,5
1. Rajiv Srivastava, Derivatives and Risk Management, Oxford University Press, 2014
2. John C Hull, Options, Futures and Other Derivatives, Pearson Education
3. David A Dubofsky and Thomas W Miller,Jr, Derivatives : Valuation and Risk
Management, Oxford University Press.
4. Howard Corb, Interest Rate Swaps and Other Derivatives, Columbia Business School
Publishing
Web resources:
There are lots of web resources for finance especially for options and derivatives. Here are
just a few:
http://www.isda.org/educat/faqs.html#1
http://www.cboe.com/Strategies/VIXProducts.aspx
http://www.optionsandfuturestrading.com/Options_Trading_101.html
(An online resource for futures and options trading)
http://khelostocks.com/indian/sharemarket/stocks/showMyPerformance.html#
(Khelostocks is a social community for Indian investors which provides tutorials, virtual
stocks
trading game and investment information )
Financial Intelligence net work http://www.moneyscience.com/
2
Futures Industry Association http://www.futuresindustry.org/futures-industry.asp
Options Industry Council http://www.optionseducation.org/en.html
International Association of Financial Engineers http://iafe.org/html/
CO 1 Describe basics of risk, types of risk and risk management tools and their
application.
CO 2 Explain Derivatives products like forwards, futures, options and swaps and their
usage.
CO 3 Compute pricing of derivative products like forwards, futures, options and swaps
PGDM - PSOs:
On successful completion of the program, graduates will be able to:
PSO1. Understand, analyse and apply management concepts in the multi-functional areas
of business like marketing, human resources, finance etc. for efficient conduct of business
organisations.
PSO2. Apply the advanced tools of business analysis for providing solutions in a multi-
disciplinary environment.
PSO3. Integrate the knowledge of global business environment in business decision
making.
3
Assignment [Derivatives Game 10 Group activities to expose the students
(refer annexure –II)] on the futures and options markets.
Case Studies (Annexure – I) 10 Cases will be discussed to improve the
students understanding of application of
concepts.
Mid-term examination 20 Descriptive test.
Term-end examination 50 Questions with short and medium length
descriptive answers covering both
concepts and application.
Total 100
Conduct of Tests /Quizzes at regular intervals helps the faculty to understand the students
understanding and also their attentiveness which helps in to keep them in active learning
mode.
Group exercise/Project(s) makes the students to learn the aspects beyond the classroom
topics coverage and bridge the gap between the theory and practice.
Group learning will help the students to learn group behaviour and can learn working in
teams.
Assessment tool - CO Matrix: (Note: If there ‘n’ quizzes, fill for each quiz separately)
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and their usage.
CO3 Compute pricing of 3 3 3 3 3 3 3
derivative products
like forwards,
futures, options and
swaps
CO4 Design risk 3 3 3 3 3 3 3 3
management
strategy using
derivatives products
to manage risk.
At the end of this course, students are required to provide feedback on the following items:
Session PLAN
Unit Sess Topic Reading
# ion
#
Unit Derivatives market in India Chapter- Exercises Pedagogy
I Pre reads
1 Course Outline discussion Chapter -02 PPT and
Introduction to derivatives Pg. - 18-23 Lecture Method
International Derivatives Market cftc website
, Derivatives in India, at
www.cftc.go
Operations of Derivatives
v/, nse
Exchanges, website at
www.nseindi
a.com
2 Trading System, Clearing and Chapter -02 Trading Lecture
Settlement system. Pg.- 24-30 Platforms in method
5
NSE &List of combined
contracts with
available in examples
Indian from NSE
Exchanges Case let: Jet
Air ways risk
management
Unit
II
Introduction to Futures
6 Introduction to futures, Chapter-5 Page no.101 PPT and
marking to market, basis Pg.77-97 Prblm:1,2,3,4,a lecture
Margin and Marking to Web site nd 6 method-
Market, Pricing of futures of NSE NPTEL
contracts ,CME- vedio
Reading
futures
prices in
the wall
street
journal
7 Hedging strategies using Chapter-6 Page No-120 Problem
futures, calculation of hedge Pg.-103- Prblms-1,2,3 Solving and
ratio 121 lecture
Ex:-6.10, method on
6.14 hedging
strategies of
MNcs
8 Risk management with future Chapter-6 Case study: Sai Case
6
contracts, risk in hedging Pg.no.116 Ram Metals discussion
using single stock futures, Prblm.no.6 Page :121
pricing of stock futures, .4 Assignment-
arbitrage profit Chap-07 arbitrage profit
Page.no.12
8
Problem
7.2
9 Risk management with stock Chapter-07 Page.no.135- Visiting NSE
index futures, Stock index Pg .no.129 141 and BSE,
futures, what is an index, Prblm.no.7 Problems contract
methodology of index, .3,7.4 7.7,7.9,7.11 specification
Pricing of index futures, of stocks and
portfolio insurance stock futures
10 Test(10 Marks)-30 minutes Chapter-07 Solving Test and
Portfolio insurance using Ex:7.8,prbl problems on Lecture
index futures m:7.21 portfolio method for
insurance concept of
Portfolio
insurance
11 Portfolio insurance using Chapter-07 Solving Lecture
index futures Pg.no.150- problems on Method
160 portfolio
Ex:7.9,prbl insurance
m:7.22 using index
futures
7
tary books
15 Straddles and strangles Chapter-15 Problem no.5 PPT
Pg.425- Pg-334.(text
436 book)
Examples
from
Supplemen
tary books
16 Pricing restrictions for calls, Chapter-14 Problem no. PPT and
Pricing restrictions for Pg.337- Pg.362 Problem
puts,Put -call Parity Theorem 362 Prblm-2&5 Solving
Prblm-
1,3,5
17 Binomial option pricing Chapter-15 Problem no.1,3 Lecture
model- European and Pg.364- Pg-388 method
American call & put 376
Prblm-
15.5,2(pg.
388)
18 Binomial option pricing Chapter-17 Calculation of Lecture
model – European and Pg.386 Option price method
American Call and Put Prblm.15.8 Using
&11(pg- software
388)
19 Black – Scholes option Chapter-16 Calculation of Lecture
pricing model –European or Pg.390- Option price method
American call on a non 404 Using BSOP
dividend paying stock,Put Examples software
Prices, BSOPM on Paying from Case study-
securities paying known Supplemen Delphi Capital
dividend tary books Management
Prblm.2- (DCM)Prasann
Pg.410 a Chandra
20 Estimating the variance of a Chapter-16 Collection of Lecture
stocks returns, Implied Pg.405- Historical data method and
volatility 410 related to Usage of tool
options and for
calculation of calculation of
variance in margin to be
Excel sheet, paid by the
client to the
broker and
India VIX ,
21 Risks in option trading, basics Chapter-18 Calculation of Problem
of greeks in option trading Pg.443- Option price Solving
458 Using options
software
Unit Introduction to Swaps and
V other Derivatives
8
22 Introduction to swaps, interest Chapter – Case study: Case
rate swaps, currency swaps 10 Aviatronics discussion
and commodity swaps, using Pg.-228 case (page
swaps to manage risk. Prblm.-1 no.229)
23 Pricing and valuing Plain Chapter Case study: Test on Case
Vanila Fixed-Floating Interest -10 Aviatronics discussion
swaps , Pg.228 case (page
Prblm-3&7 no.229)&
Prblm.no.5-
Pg.228
24 Credit Derivatives back Chapter-20 Pre read Discussion
ground and types of credit Pg. 481- Article-Did with video on
derivatives 487 Deregulated sub prime
Derivatives crisis
cause the https://www.y
Financial outube.com/w
crisis? Case- atch?
Sub Prime v=xWBI8xVJI
vw
Crisis
Note: Cases will be distributed to students prior to the scheduled class discussion.
Class Etiquette
The purpose of etiquette rules is to ensure that no one interferes with the learning of
others. The students are expected to strictly adhere to the following guidelines.
The students are expected to occupy their seats by the time the course facilitator steps
into the class.
The students are not allowed to change their seats and move around in the class.
The students are not allowed to enter into the class after 5 minutes of the scheduled
time/ after the course facilitator gets into the class.
The students are expected to respond when a question is being asked but they are
advised to raise their hand (don’t yell) when he/she wants to respond to the question.
The students are not allowed to turn their head or any kind of consultation while
writing the exams in the class. Any violation would lead to awarding ZERO marks
there itself.
The students are not allowed to open their laptops unless indicated in the class.
The students are advised to switch off their mobile phones.
The homework assignments are due for submission at the beginning of the class
period.
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You are encouraged to meet me at my cabin during office hours for questions,
concerns, or, suggestions.
The students are advised to pay 100 percent attention to the class for better learning.
The students are expected to carry the text book, laptop, calculator and course outline
for the class.
Any violation of any of the guidelines mentioned above would attract suitable
action (punishment).
ANNEXURE – I
(CASE ANALYSIS)
Cases are to be discussed in class. Most cases do not have "right" answers. Being "right" or
"wrong" should not be of your concern, when participating - or deciding whether to make a
comment. Don’t be afraid to disagree with comments by your fellow students (or facilitators’
comments, for that matter). If there is complete agreement on case solutions, then something
is wrong! Critical discussion and disagreement are to be expected and encouraged.
Groups will be formed at the beginning of the term. A case brief (as word document) by each
group has to be prepared. Case briefs should not be less than six pages:
A suggested structure for a case brief: (1) details of background knowledge required for
solving the case - one page (2) case back ground – half page (3) various levels of problem
identified in the case – one page (4) details of your analysis and your interpretations – 2
pages (5) specific recommendations and implementation – one page (6) final conclusion –
half page.
Exhibits, figures, and numerical calculations should be attached on separate pages.(if
necessary).
In case solving, the groups are expected to apply the knowledge of strategic management and
its related subject knowledge, as well as all other necessary skills, to decide how to resolve
the problem identified in the case. The group can use necessary assumptions in solving the
case. The assumptions have to be strongly supported by logical explanations. Be specific and
assertive.
The groups are expected to come prepared with their own case analysis kept ready for
presentation. The presentation should cover understanding of the problems, analysis,
comments and conclusions. Any one or entire group randomly called to make presentation.
The prepared case brief (word file) and presentation (power point file) have to be submitted
to the course facilitator on or before the scheduled time.
The presentation and case discussion mark (for the group) will be provided only on the
performance of the member who presents it.
Each group shall go through the case, analyse (with respect to concepts learned so far and
questions posed at the end of the case) and prepare a case write up. Each group has to submit
a two pages’ case write up. Marks will be given based on case write up and viva-voce. Every
group is expected to prepare the allotted case in-depth.
Evaluation Component Marks %
Case write up (6 pages) 30%
10
Case Presentation (All members of the group must present 50%
the case with equal responsibility)
Viva-voce- Q & A (For the purpose of individual 20%
assessment)
11
(BE < 2.50, ME 2.6 – 4.0, fairly good and able
EE > 4.1 to bring audience
interest towards the
case and have
elaborate objectively
participation from
the audience.
Each group needs to construct a portfolio by selecting a bunch of derivative products. The
available notional capital for investment is Rs.10,00,000. The amount invested will be based
on closing prices. A hard copy and soft copy with excel sheet of the portfolio has to be
submitted to the course facilitator. A group is allowed to revise their portfolio 3 times on or
before the final day of submission. All the revision has to be made after the market hours and
has to be submitted to the facilitator through a soft/hard copy by mentioning the reasons for
revision of the portfolio. On any revision made in the portfolio, the closing price existing on
the day of revision will be counted as the traded price. Use excel sheet ‘Portfolio
Construction using Derivatives’ for portfolio construction and ‘Portfolio Revision 1, 2, and 3’
for portfolio revisions. The students are expected to name the files with appropriate section,
group, and revision details before submitting the file. The evaluation will be based on
rationality adopted in portfolio construction and revision, selection of derivative products,
justification/valid reason for product selection, strategy used in portfolio construction, and
returns earned during the period. All the groups have to maintain the spirit of the game and
try to maximize the return.
*Keep your investment strategy very confidential and do not discuss with any of the other
group members.
Submission Procedure:
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The portfolio should be constructed and the copy of the same should be submitted within 10
working days after commencement of first class. The three allowed revisions can be made
and copy of the same should be submitted as and when it has been done. The game would
come to an end two sessions before the last class. The groups are expected to make the
presentation in the scheduled slots.
The portfolio document should consist of the financial derivative (stock options and futures)
products that the group has chosen the prices at which they bought and expected price rise
level, the basis for selection, and the expected returns that the portfolio generates. The brief
details of the derivative products chosen for risk management and key financial details should
also be included.
Note : Submission dates will be finalized after having discussion with the students in the
class.
The following aspects should be taken care by the groups while constructing the portfolio.
1. No short selling.
2. The groups can buy financial derivative products (which are listed in exchanges and
having liquidity)
3. No foreign exchange transactions.
4. No positions in the foreign stock exchanges
5. No commodity derivatives
6. No intraday trading.
Assignment Time Lines (Date of submission will be finalized in consultation with students in
the class)
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(BE < 3.0, ME 3.1 - 4.0, sharing, respecting and done; some conclusions is very good; the data
EE > 4.1) participation is at drawn are valid; Team presentation is very well
expected level dynamics like sharing, done;
respecting and Team dynamics like
participation is at sharing, respecting and
moderate level participation is at more
than expected level
14