INDIAN INSTITUTE OF MANAGEMENT JAMMU

Master of Business Administration

Financial Derivatives
Term - IV

Course Rationale:
Derivatives have been growing at a rapid pace in the last few decades and are occupying an increasingly
important position in the global financial market. The Derivative market in India, like its counterparts
abroad has significantly gained importance. Since its inception in 2000, its popularity and its volume has
grown manifold. Evidenced from the fact that NSE made its mark in the global ranking with the
turnover, which surpassed the cash segment. Derivative instruments play a key role in transferring a wide
range of risks prevalent in the economy from one entity to another. Given the large size of the global
derivative market, a careful study of derivative securities becomes very important to a financial analyst.
Course Objectives:
To provide:
• A clear conceptual understanding of Derivative markets, Products and Trading Process, with special
focus to Indian market;
• A practical knowledge of mechanics of various types of derivatives and their trading;
• An Insight into Derivative valuation process.

Learning Outcomes:

On completion of the course, participants should be able to:

1. Define and identify different types of derivatives, structure and properties of forwards, futures,
options and swaps and their types;
2. Understand the mechanics of construction of derivatives, their trade and settlement cycles;
3. Analyze the properties of Forwards, Futures, Options and Swaps;
4. Synthesize various option strategies;
5. Evaluate derivative contract values based on real live market data

Pedagogy:
• A mix of pedagogy would be adopted class room lectures, problem solving, and real live data
analysis. Participants will be trained to read the price quotes for option and future trading. Versatile
interest and knowledge of equity trading and basic understanding of commodity market will be
warranted as the course progresses. This course calls for rigorous reading and thorough preparation
both before and after each session.

Textbook:
• Options, Futures and other Derivatives, 10e, Hull, John C. and Basu, Sankarshan, Pearson, 2018
Reference Books:
• Futures, Options and Swaps, 5e, Kolb, Robert W., Overdahl, James A., Blackwell Publishing Wiley-
India, 2012elopment of Financial Derivatives Market In India- Vashishtha-Kumar, International
Research Journal of Finance and Economics, ISSN 1450-2887 Issue 37, 2010
https://casi.sas.upenn.edu/sites/casi.sas.upenn.edu/files/iit/Derivatives%20-%20Vashishtha.pdf.
• Derivatives Essentials: An Introduction to Forwards, Futures, Options and Swaps, Gottesman, Aron,
Wiley, 2016
• Derivatives Demystified, Chisholm, Andrew, Wiley
• Derivatives and Financial Innovations, Bansal, Mahesh and Navneet, Tata McGraw Hill, 2012
Journals:
• International Journal of Financial Markets and Derivatives;
• Journal of Derivatives
• Journal of Derivatives and Hedge funds
• Journal of Futures Markets
• Journal of Financial Markets
• International Research Journal of Finance and Economics

Links to websites:
• https://www.nseindia.com/live_market/dynaContent/live_watch/derivative_stock_watch.htm
• https://www.nseindia.com/products/content/derivatives/currency/cd.htm
• http://www.bseindia.com/markets/Derivatives/DeriReports/derimarketwatch.aspx
• http://www.sebi.gov.in/
• https://www.mcxindia.com/
• http://www.cmegroup.com/
• https://www.isda.org/
• https://www.theocc.com/
• http://www.optionstrading.org
Evaluation Scheme:
• Quiz 10%
• Live Project work/ Assignments 15%
• Midterm Exam 25%
• Term-End Exam 50%
TOTAL 100%

Session Plan:
Session Topic (including subtopics) Learning Outcomes Pedagogical Tool Textbook
Chapters &
Readings
1 Introduction to Derivatives Understand the Lecture & Class Chapter:1
• History of derivatives- construction of Discussion
• Types of derivatives; Derivative markets and
• Uses of derivatives; the products
• Arbitrage, Speculation,
Hedging;
• Overview of Indian and
International derivative market

2 Mechanics of Futures Markets Analyze Futures Lecture & Class Chapter:2

• Structure of Futures contract- Markets, the process Discussion &
• Settlement- Margin- and trading mechanics Problem Solving
• Hedging Strategies-
• Convergence of Future prices
to Spot prices;
• Types of orders
3 Hedging Strategies using Apply Futures for Problem Solving Chapter:3
Futures hedging and Discussion
• Arguments for and against
hedging
• Basis risk
• Cross hedging
 • Rolling the hedge forward
4-5 Determination of Forward & Estimate Future prices Problem Solving Chapter:5
Futures Prices and arrive at the with discussion
• Known income expected future spot
• Known Yield price
• Valuing Forward Contracts
• Futures prices of stock indices
• Cost of carry
• Delivery options
• Futures prices &expected
future spot price
5-6 Interest Rates Apply interest rates, Problem Solving Chapter:4
• Types of rates-zero rates compounding with discussion
• Bond pricing frequency, Zero rates;
• Determining treasury zero Gain a conceptual
rates understanding of
• FRAs Forward Rates,
• Duration & Convexity Forward Rate
• Theories of the term structure Agreements (FRAs),
of interest rates Bond Duration
7 Interest Rate Futures Apply Interest rate Problem Solving Chapter: 6
• Day count and quotation Futures, Euro Dollar with discussion
conventions- Futures, and Duration-
• Treasury bond futures- based Hedging.
• Eurodollar futures
• Duration based hedging
strategies using futures-hedging
portfolios of assets and
liabilities
8 Swaps Evaluate mechanics of Problem Solving Chapter:7
• Mechanics of interest rate Interest Rate Swaps with discussion
swaps-confirmations-the (IRS);
nature of swap rates- Valuation of Interest
• Valuation of Interest Rate Rate Swaps (IRS)&
Swaps Currency Swaps
• Valuation of Currency Swaps
• Credit risk- other types of
Swaps
9 Mechanics of Option Markets Understand the option Problem Solving Chapter 10
• Types of Options markets and process with discussion
• Underlying Assets
• Specification of Stock
Options-
• Trading-Commissions-
Margins-
• Warrants- Stock Options-
Convertibles
10 Properties of Stock Options: Analyze the factors Problem Solving Chapter:11
• Upper and Lower bounds for which affect Stock with discussion
Option prices; option prices;
• Put –Call parity
• American Options: Non-
Dividend paying Stocks: early
exercise: Calls & Puts;
• Effect of dividends
11-12 Trading Strategies involving Synthesize and evaluate Real live Project Chapter:12
Options various option trading work &
 • Spreads-Combinations-Other strategies discussion
Payoffs
13-14 Pricing & Valuing Options Estimate Option value Problem Solving Chapter:
• Binomial Trees using different with discussion 13&Ch 15
• Black-Scholes-Merton Model valuation models
15-16 Real Options Evaluate Real Options Problem Solving Chapter: 36
• Introduction to Real Options with discussion
• Option to Expand, Abandon
17-18 Greek Letters Analyze Greeks, which Problem Solving Chapter: 19
• Delta measure different with discussion
• Theta dimensions of risk in an
• Gamma Option position;
• Vega
• Rho
19 Options on Stock Indices Apply Options on PPT & Class Chapter:
Stock Indices discussion 17:17
20 Futures Options Apply Options on PPT & Class Chapter: 18
Futures and their discussion
pricing;