Management Development Institute Gurgaon

Course Outline
Programme: Post Graduate Programme in Management

Title of the Course : Derivatives and Risk Management Course Credit :3

Core/Elective : Elective Term : IV
Area : Accounting and Finance Academic Year : 2019-20
Course Faculty : P. C. Biswal Contact No. : Ext. 5379
Email : pcbiswal@mdi.ac.in

I. Introduction/Description of the Course

This course is designed to provide a solid foundation in the principles of risk management
using derivatives. It attempts to strike a balance between institutional details, theoretical
foundations, and practical applications. This course provides understanding about various
financial risks such as market risks, credit risks, and liquidity risks; and management of
above risks using derivatives products. These risk management instruments have also
become extremely popular investment tools over the past 35 years, as they allow one to
tailor the amount and kind of risk one takes, be it risk associated with changes in interest
rates, exchange rates, stock prices, commodity prices, inflation, etc. They are used by
institutions as well as investors, sometimes to hedge (reduce) unwanted risks, sometimes
to take on additional risk motivated by views regarding future market movements.
Emphasis in this course will be on identification of the sources of financial risks;
measurement of risks and management of risks. This course has been developed to equip
the students to be future ready as risk managers. As far as possible, this course will be
delivered at an applied, non-mathematical level. Students, who appreciate additional
mathematical rigor, could meet me at my office for discussion.

II. Course Objectives/Learning Outcomes/Competencies

The learning objectives of this course are:

1. To understand the role of risk management as well as the techniques available for its
measurement in financial and non-financial corporations.
2. To review the set of financial instruments available in modern financial markets such
as forwards, futures, options, swaps, and credit derivatives for risk management
3. To familiarize with the strategies available in practice that a firm can use to optimise
the management of the risks.
4. To equip students to develop trading and investment skills in derivatives instruments
5. To build a framework that will help integrate financial risk management into an overall
corporate strategy

III. Pedagogical Methods

The class meetings will be a mix of lecture, group discussions and case study applications.
Students are advised to complete assigned readings in advance of class and come prepared
to contribute to class discussions. On top of the course material for the day, a typical lecture
 will most likely include discussing something from the financial press for a few minutes.
Bloomberg terminal will be used for trading and investment discussions.

IV. Evaluation Criteria

Sr. No. Name of Component Number Weightage Assigned

1 Quizzes 4 15%
2 Trading Assignment 1 15%
3 Group Project 1 10%
4 Mid-Term Examination 1 30%
5 End-Term Examination 1 30%
Total Weightage Assigned 100%

V. Text Book

John C. Hull and Sankarshan Basu, Options, Futures, and Other Derivatives, 9th edition,
Pearson, 2016. (hereafter OFOD)

VI. Content and Session Plan

Session Session Theme Additional Reading/Cases

No.
1-2 Topic: Defining, measuring, and hedging Case: Risk Management at Apache
exposures to financial risks
Readings:
Deliverables: 1. Owning the right risk: Kevin Buehler,
a. Introduction to financial risk Andrew Freeman, and Ron Hulme,
management Harvard Business Review, September
b. Risk management (hedging) and value 2008.
creation for companies 2. The Six Mistakes Executives Make in
c. Risk management in financial and non- Risk Management, Nassim N. Taleb,
financial organizations Daniel J. Goldstein, and Mark W.
Spitznagel, Harvard Business Review,
October 2009.
3-6 Topic: Derivatives for hedging and Cases:
investments: Forwards and Futures 1. Metallgesellschaft’s Hedging
Debacle
Deliverables: 2. Alliance Design Concepts: Foreign
a. Introduction to forwards and futures Exchange Risks
b. Pricing and valuation of forwards and
futures Readings:
c. Hedging and basis risk 1. Chapters 2, 3, & 5 of OFOD
d. Commodity futures and price risk 2. Financial futures: Scott P Mason,
management Harvard Business School, December
1999.
3. Commodity futures as an asset class,
FTK Note by Rabobank, 10 April
2006.
7 - 10 Topic: Option and option like instruments Cases:
1. FX Risk Hedging at EADS
Deliverables: 2. Pine Street Capital
a. Call and Put options
b. Options arbitrage relationships Readings:
c. Option pricing models: BOPM & BSM 1. Chapters 9, 10, 11, 12, 14 & 18 of
d. Options prices and valuations of OFOD
options 2. Options on futures: An introductory
e. Options Greeks and delta hedging guide, by Chicago Mercantile
Exchange

11 - 13 Topic: Swap for Hedging Cases:

1. The B.F. Goodrich-Rabobank interest
Deliverables: rate swap
a. Introduction to Swaps 2. Hedging Currency Risk at TT Textiles
b. Types of Swaps: plain vanilla and
cross-currency swaps Readings:
c. Pricing and valuation of Interest rate 1. Chapter 7 of OFOD
swaps 2. Interest rate swaps, by Westpac
Banking Corporation
3. Currency Swap, Harvard Business
School, 1996
14-15 Topic: Interest Rate Derivatives Case:
1. Union Carbide Corporation: Interest
Deliverables: Risk Management
a. Forward Rate Agreements
b. Interest Rate Futures Readings:
c. Hedging of assets and liabilities 1. Chapters 4 & 6 of OFOD
2. Interest Rate Futures, National Stock
Exchange, India
16-18 Topic: Credit Risk Management and Cases:
Credit Derivatives 1. First American Bank: Credit Default
Swaps
Deliverables: 2. Saginaw Parts Co. and the General
Motors Corp. Credit Default Swap
a. Managing credit risk using credit
derivatives Readings:
b. Types of CDs: CDS, CLNs, credit 1. Chapters 23 & 24 of OFOD
spread options, CDOs and synthetic 2. A Note on Credit Derivatives in India,
CDOs by P. C. Biswal.
c. Credit derivatives and financial 3. The credit derivatives market: its
stability development and possible implications
for financial stability, by David Rule,
Financial Stability Review, June 2001,
Bank of England
19 -20 Topic: Learning’s from the course: Readings: Project Reports of all the
Project Presentations groups
VII. List of Reference Book(s) and Suggested Readings

However, from time to time, we will follow other materials which are perhaps equally
important individually and collectively more.

1. Aman Chugh and Divik Maheshwari, “Financial Derivatives: The Currency and Rates
Factor”, Pearson, 2013
2. Rajiv Srivastava, “Derivatives and Risk Management”, Second Edition,Oxford University
Press, 2014.

Apart from the above mentioned, visit the following sites for more:

1. https://www.nseindia.com/: For equity and currency derivatives

2. https://www.mcxindia.com/: For commodity derivatives
3. http://www.msei.in/index.aspx: For currency derivatives
4. https://www.rbi.org.in/: For interest rate and credit derivatives policies
5. http://www2.isda.org/: For credit derivatives data and policies world wide

VIII. Other Detail

Assignment:

There will be a group assignment. The class would be paired into groups of either Five or
Six which will depend upon the work effort involved in the group assignment. Each group
will have one assignment during the course period which will take the form of a 25 minute
presentation based on an assigned issue/problem. Each group should also circulate a typed
text to the class one day prior to their presentation. The assignment will be graded on the
intellectual coherence and overall quality of the typed text plus the quality of the
presentation which will also include aspects such as presentational innovation and time
management. Group presentations will take place only after getting go ahead signal from
the course facilitator.

Other Notes:

 Please arrive on time and do not enter the classroom after we already have taken the
attendance.
 The homework assignments are due at the beginning of the class period. Please note
that no late assignments (no matter how late) will be accepted once the class starts.
 You are encouraged to drop by my office during office hours for questions, concerns,
or, suggestions. Outside the office hours, please make an appointment with me in
advance, before or after the class, via phone or e-mail. For quick questions that you
may have, note that e-mailing is a very efficient means of communicating with me.

Plagiarism, Copying and Cheating:

I shall not tolerate cheating or assisting others to cheat, and view cheating in coursework
as a serious academic offence. The work that a student submits for grading must be the
student’s own work, reflecting his or her learning. Where work from other sources is used,
it must be properly acknowledged and referenced. This requirement also applies to sources
on the world-wide web. A student’s work may be reviewed against electronic source
material using computerised detection mechanisms. Upon reasonable request, students may
be required to provide an electronic version of their work for computerised review.

Other Useful Information:

Recommended to carry calculator (or lap top), and course material to all the sessions. Keep
a personal record of scores on all quizzes, and assignments. The facilitator will distribute a
copy of your grades that have been recorded at a session following each exam. If any error
has been made, it is the student's responsibility to present written proof of the correct grade
within one two days of receiving the grade sheet. The course outline and accompanying
assignment schedule are subject to change. In the event of a change, an announcement will
be made in the classroom or a handout detailing the revised policy/assignment will be
distributed. On any evaluation component if more than 80 percent of the students fail; there
will be one more chance given to all the students for making up their grades

The students opting for this course should have sound knowledge in basic statistics and
mathematics. More so they should be interested in dealing with numbers and equations. No
copying in assignments. No request for postponement of deadlines. No alternative
evaluations. This course is only for the students, who have enrolled for the course. No
students will be allowed under auditing and what so ever form, if not registered.