BIRLA INSTITUTE OF TECHNOLOGY & SCIENCE, PILANI

WORK INTEGRATED LEARNING PROGRAMMES

Digital
Part A: Content Design

Course Title Derivatives & Risk Management

Course No(s) FIN ZG 514
Credit Units 4
Credit Model
Content Authors Shekhar Rajagopalan

Course Objectives
No

CO1 To understand the role of financial risk management as well as the techniques available
for its measurement in financial and non-financial corporations.

CO2 To review the set of financial instruments available in modern financial markets as well
as the strategies that a firm or and an individual can use to optimize the management of
the risks this company is faced to, and

CO3 To build a framework that will help integrate financial risk management into an overall
corporate strategy.

Text Book(s)
T1 John C. Hull & Basu Sankarshan, Options, Futures and Other Derivatives, 8th
Edition, Pearson Education.

Reference Book(s) & other resources

R1 Understanding Futures Markets by Robert W. Kolb and James A. Overdahl, 6th
edition, Blackwell
R2 International Financial Management by Cheol Eun, and Bruce G. Resnick, 6th edition,
McGraw-Hill.
R3 Derivatives, by Rangarajan Sundaram, Sanjiv Das, McGraw Hill, 1st edition
R4 Risk Management and Financial Institutions, John Hull

Learning Outcomes:
No Learning Outcomes

LO1 Be able to understand how the derivative markets work

LO2 Be able to discuss the characteristics of financial derivative securities

LO3 Will have knowledge of different derivative instruments.

LO4 Will understand how derivatives are priced.

LO5 Will understand how to replicate a derivative instrument's cash flow.

LO6 Will understand how derivative instruments are used in risk management.
Content Structure
1. Introduction to Derivatives Market
1.1 Exchange-traded markets
1.2 Over-the-counter markets
1.3 Forward contracts
1.4 Futures contracts
1.5 Options
1.6 Types of participants
1.7 Interest Rates
2. Mechanics of futures markets
2.1 Specification of a futures contract
2.2 Convergence of futures price to spot price
2.3 The operation of margins
2.4 OTC markets
2.5 Market quotes
2.6 Delivery
2.7 Forward vs. futures contracts
3. Hedging strategies using futures
3.1 Basic principles
3.2 Arguments for and against hedging
3.3 Basis risk
3.4 Cross hedging
3.5 Stock index futures
3.6 Stack and roll
4. Interest rates
4.1 Types of rates
4.2 Measuring interest rates
4.3 Zero rates
4.4 Bond pricing
4.5 Determining Treasury zero rates
4.6 Forward rates
4.7 Forward rate agreements
4.8 Duration
5. Determination of forward and futures prices
5.1 Investment assets vs. consumption assets
5.2 Short selling
5.3 Assumptions and notation
5.4 Forward price for an investment asset
5.5 Known income
5.6 Known yield
5.7 Valuing forward contracts
5.8 Are forward prices and futures prices equal?
5.9 Futures prices of stock indices
5.10 Forward and futures contracts on currencies
5.11 Futures on commodities
5.12 The cost of carry
5.13 Delivery options
5.14 Futures prices and the expected future spot price
6. Interest rate futures
6.1 Day count and quotation conventions
6.2 Treasury bond futures
 6.3 Eurodollar futures
6.4 Duration-based hedging strategies using futures
6.5 Hedging portfolios of assets and liabilities
7. Swaps.
7.1 Mechanics of interest rate swaps
7.2 Day count issues
7.3 The comparative-advantage argument
7.4 The nature of swap rates
7.5 Determining the LIBOR/swap zero rates
7.6 Valuation of interest rate swaps
7.7 Currency swaps
7.8 Valuation of currency swaps
7.9 Credit risk
7.10 Other types of swaps
8. Mechanics of options markets
9.1 Types of options
9.2 Option positions
9.3 Underlying assets
9.4 Specification of stock options
9.5 Trading
9.6 Commissions
9.7 Margins
9.8 The options clearing corporation
9. Properties of stock options
9.1 Factors affecting option prices
9.2 Assumptions and notation
9.3 Upper and lower bounds for option prices
9.4 Put–call parity
9.5 Calls on a non-dividend-paying stock
9.6 Puts on a non-dividend-paying stock
9.7 Effect of dividends
10. Trading strategies involving options
10.1 Principal-protected notes
10.2 Trading an option and the underlying asset
10.3 Spreads
10.4 Combinations
10.5 Other payoffs
11. Binomial trees
11.1 A one-step binomial model and a no-arbitrage argument
11.2 Risk-neutral valuation
11.3 Two-step binomial trees
11.4 A put example
11.5 American options
11.6 Delta
11.7 Matching volatility with u and d
11.8 The binomial tree formulas
11.9 Increasing the number of steps
12. The Black–Scholes–Merton model
12.1 Lognormal property of stock prices
12.2 The distribution of the rate of return
12.3 The expected return
12.4 Volatility
12.5 Black–Scholes–Merton pricing formulas .
 12.6 Implied volatilities
13. The Greek letters
13.2 Naked and covered positions
13.3 A stop-loss strategy
13.4 Delta hedging
13.5 Theta
13.6 Gamma
13.7 Relationship between delta, theta, and gamma
13.8 Vega
13.9 Rho
13.10 The realities of hedging
14. Credit risk
14.1 Credit ratings
14.2 Historical default probabilities
14.3 Estimating default probabilities from bond prices
14.4 Using equity prices to estimate default probabilities
14.5 Credit risk in derivatives transactions
15. Credit derivatives
15.1 Credit default swaps
15.3 CDS forwards and options
15.4 Basket credit default swaps
15.5 Total return swaps
15.6 Collateralized debt obligations
 Part B: Learning Plan

Academic Term Second Semester 2020-2021

Course Title Derivatives & Risk Management
Course No FIN ZG514
Lead Instructor Shekhar Rajagopalan

Contact Hour 1
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 1 Introduction to Course Course Handout

Introduction to Derivatives Market Chapter 1

During CH 1 Introduction to Course Chapter 1

Introduction to Derivatives Market

Post CH 1 Introduction to Derivatives Market Chapter 1

Contact Hour 2
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 1 Introduction to Derivatives Market Course Handout

Chapter 1

During CH 1 Introduction to Derivatives Market Chapter 1

Post CH 1 Introduction to Derivatives Market Chapter 1

Contact Hour 3
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 1 Interest Rates Class Notes

During CH 1 Interest Rates Class Notes

Post CH 1 Interest Rates Class Notes

Contact Hour 4
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 2 Mechanics of Futures Market Chapter 2

During CH 2 Mechanics of Futures Market Chapter 2

Post CH 2 Mechanics of Futures Market Chapter 2

Contact Hour 5
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 3 Hedging Strategies using Futures Chapter 3

 During CH 3 Hedging Strategies using Futures Chapter 3

Post CH 3 Hedging Strategies using Futures Chapter 3

Contact Hour 6
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 3 Hedging Strategies using Futures Chapter 3

During CH 3 Hedging Strategies using Futures Chapter 3

Post CH 3 Hedging Strategies using Futures Chapter 3

Contact Hour 7
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 3 Hedging Strategies using Futures Chapter 3

During CH 3 Hedging Strategies using Futures Chapter 3

Post CH 3 Hedging Strategies using Futures Chapter 3

Contact Hour 8
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 3 Hedging Strategies using Futures Chapter 3

During CH 3 Hedging Strategies using Futures Chapter 3

Post CH 3 Hedging Strategies using Futures Chapter 3

Contact Hour 9
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 4 Interest Rates Chapter 4

During CH 4 Interest Rates Chapter 4

Post CH 4 Interest Rates Chapter 4

Contact Hour 10
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 4 Interest Rates Chapter 4

During CH 4 Interest Rates Chapter 4

Post CH 4 Interest Rates Chapter 4

Contact Hour 11
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 5 Determination of Forward & Futures Chapter 5

Prices.
 During CH 5 Determination of Forward & Futures Chapter 5
Prices.

Post CH 5 Determination of Forward & Futures Chapter 5

Prices.

Contact Hour 12
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 5 Determination of Forward & Futures Chapter 5

Prices.

During CH 5 Determination of Forward & Futures Chapter 5

Prices.

Post CH 5 Determination of Forward & Futures Chapter 5

Prices.

Contact Hour 13
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 6 Interest Rate Futures Chapter 6

During CH 6 Interest Rate Futures Chapter 6

Post CH 6 Interest Rate Futures Chapter 6

Contact Hour 14
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 6 Interest Rate Futures Chapter 6

During CH 6 Interest Rate Futures Chapter 6

Post CH 6 Interest Rate Futures Chapter 6

Contact Hour 15
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 7 Swaps Chapter 7

During CH 7 Swaps Chapter 7

Post CH 7 Swaps Chapter 7

Contact Hour 16
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 7 Swaps Chapter 7

During CH 7 Swaps Chapter 7

Post CH 7 Swaps Chapter 7

Contact Hour 17
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 8 Mechanics of Options Market Chapter 9

During CH 8 Mechanics of Options Market Chapter 9

Post CH 8 Mechanics of Options Market Chapter 9

Contact Hour 18
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 8 Mechanics of Options Market Chapter 9

During CH 8 Mechanics of Options Market Chapter 9

Post CH 8 Mechanics of Options Market Chapter 9

Contact Hour 19
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 9 Properties of Stock Options. Chapter 10

During CH 9 Properties of Stock Options. Chapter 10

Post CH 9 Properties of Stock Options. Chapter 10

Contact Hour 20
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 9 Properties of Stock Options. Chapter 10

During CH 9 Properties of Stock Options. Chapter 10

Post CH 9 Properties of Stock Options. Chapter 10

Contact Hour 21
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 10 Trading Strategies with Options Chapter 11

During CH 10 Trading Strategies with Options Chapter 11

Post CH 10 Trading Strategies with Options Chapter 11
Contact Hour 22
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 10 Trading Strategies with Options Chapter 11

During CH 10 Trading Strategies with Options Chapter 11

Post CH 10 Trading Strategies with Options Chapter 11

Contact Hour 23
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 11 Binomial Trees Chapter 12

During CH 11 Binomial Trees Chapter 12

Post CH 11 Binomial Trees Chapter 12

Contact Hour 24
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 11 Binomial Trees Chapter 12

During CH 11 Binomial Trees Chapter 12

Post CH 11 Binomial Trees Chapter 12

Contact Hour 25
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 11 Binomial Trees Chapter 12

During CH 11 Binomial Trees Chapter 12

Post CH 11 Binomial Trees Chapter 12

Contact Hour 26
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 11 Binomial Trees Chapter 12

During CH 11 Binomial Trees Chapter 12

Post CH 11 Binomial Trees Chapter 12

Contact Hour 27
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 12 Black-Scholes-Merton Model Chapter 14

During CH 12 Black-Scholes-Merton Model Chapter 14

Post CH 12 Black-Scholes-Merton Model Chapter 14
Contact Hour 28
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 12 Black-Scholes-Merton Model Chapter 14

During CH 12 Black-Scholes-Merton Model Chapter 14

Post CH 12 Black-Scholes-Merton Model Chapter 14

Contact Hour 29
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 13 The Greek Letters Chapter 18

During CH 13 The Greek Letters Chapter 18

Post CH 13 The Greek Letters Chapter 18

Contact Hour 30
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 13 The Greek Letters Chapter 18

During CH 13 The Greek Letters Chapter 18

Post CH 13 The Greek Letters Chapter 18

Contact Hour 31
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 14 Credit Risk Chapter 23

During CH 14 Credit Risk Chapter 23

Post CH 14 Credit Risk Chapter 23

Contact Hour 32
Type Content Ref. Topic Title Study/HW Resource Reference

Pre CH 15 Credit Derivatives Chapter 24

During CH 15 Credit Derivatives Chapter 24

Post CH 15 Credit Derivatives Solve selected textbook problems
Evaluation Scheme:
Legend: EC = Evaluation Component; AN = After Noon Session; FN = Fore Noon Session
No Name Type Duratio Weight Day, Date, Session, Time
n
EC-1 Quiz-I Online - 5% February 1-15, 2021
Quiz-II Online 5% March 1-15, 2021
Experiential Learning 1 Assignment 15% April 1-15, 2021
EC-2 Mid-Semester Test Closed Book 2 hours 30% Sunday, 07/03/2021 (FN)
10 AM - 12 Noon
EC-3 Comprehensive Exam Open Book 3 hours 45% Sunday, 02/05/2021 (FN)
9 AM – 12 Noon

Notes:
 Syllabus for Mid-Semester Test (Closed Book): Topics in Session Nos. 1 to 16 (contact hours)
 Syllabus for Comprehensive Exam (Open Book): All topics (Session Nos. 1 to 32) (contact hours)
 Experiential Learning: This will be an individual assignment. Each student will be given NSE data for a
particular company. They will need to compute the statistics required for evaluating a Futures price and
Options prices. They will then need to identify arbitrage opportunities and compute the risk-free profits.

Important links and information:

Elearn portal: https://elearn.bits-pilani.ac.in
Students are expected to visit the Elearn portal on a regular basis and stay up to date with the latest
announcements and deadlines.
Contact sessions: Students should attend the online lectures as per the schedule provided on the Elearn
portal.
Evaluation Guidelines:
1. EC-1 consists of either two Assignments or three Quizzes. Students will attempt them through the
course pages on the Elearn portal. Announcements will be made on the portal, in a timely manner.
2. For Closed Book tests: No books or reference material of any kind will be permitted.
3. For Open Book exams: Use of books and any printed / written reference material (filed or bound) is
permitted. However, loose sheets of paper will not be allowed. Use of calculators is permitted in all
exams. Laptops/Mobiles of any kind are not allowed. Exchange of any material is not allowed.
4. If a student is unable to appear for the Regular Test/Exam due to genuine exigencies, the student
should follow the procedure to apply for the Make-Up Test/Exam which will be made available on
the Elearn portal. The Make-Up Test/Exam will be conducted only at selected exam centres on the
dates to be announced later.

It shall be the responsibility of the individual student to be regular in maintaining the self study schedule as
given in the course handout, attend the online lectures, and take all the prescribed evaluation components
such as Assignment/Quiz, Mid-Semester Test and Comprehensive Exam according to the evaluation scheme
provided in the handout.