Course Outline

Course Details

Academic Session : 2016-17

Term : Term – IV
Course Name : Derivatives
Name of Instructor : Prof.B.B.Chakrabarti

Course Descriptions

There has been a dramatic growth in markets for financial derivatives in recent years. Modern managers can use financial derivatives such as

futures, options and swaps to hedge particular kinds of risks or to change the returns on their portfolios in certain ways. The purpose of this

course is to provide the student with the necessary skills to value and to employ futures, options and other related financial instruments. In order

to provide a useful treatment of these topics it is necessary to stress fundamentals and to explore the topics at a somewhat technical level.

Course Objectives

On completion of the course, students will be able to:

a) Describe the operation of derivative markets covered in the course.

b) Calculate the price of various derivative securities.

c) Create Strategies to meet specified goals.

d) Evaluate and Change these strategies with changing economic conditions.

e) Apply theoretical knowledge in real life situations

Resources Required for the Course

Kindly note that the total budget per student for reading materials (textbook, and non-HBS cases if any) is Rs. 1000/- only.

A. Prescribed Text Book

1) “Options, Futures and Other Derivatives” by Hull and basu, 8th. Edition.

2) “Students’ Solution Manual for Options, Futures and Other Derivatives – 8th edition” by Hull

B. Additional References if any

A:SuchanaBhawan, Audrey House Campus, Meur’s Ranchi-834008, Jharkhand.

P: 0651-2280083/113, 2285056 (Ext.: 126) F:0651-2280940, E: office.pgdm@iimranchi.ac.in, W: www.iimranchi.ac.in
C. Cases to be procured (if any)

a) “Application for Financial Futures” – HBS case no. 9-286-109

b) “Goldman Sachs & Co. Nikkei Put Warrants – 1989” – HBS case no. 9-292-113

D. Software Installation Requirement for Students (if any)

Evaluation Method

Institute Guidelines:You are requested to follow the following PGP guidelines regarding the evaluation methods of your course while you fill-
up the accompanying table.

 Individual evaluation (as against group evaluation) components should constitute at least 60 percent of the total weightage. In other words,
group components should be less than or equal to 40 percent of the total weightage. The instructor shall necessarily use written
examination(s) in mid-term and end-term examinations for evaluating students in the compulsory and elective courses.

 The weightage accorded to the end-term examination cannot be less than 30 percent. No evaluation component should have a weightage of
more than 40 percent of the total weightage. The maximum weightage for class participation or oral examination should not be more than
20 percent of the total weightage.

 When two or more Instructors are teaching the same course in different sections, they should come to an agreement on common grading
distribution for different components.

 Courses of 3 credits should have at least four components of evaluation comprising of mid-term exam, end-term exam, quizzes and one of
the either components – Class participation, Assignment, Project, Case, etc.. Courses of 1.5 credits should have at least three components
of evaluation comprising of end-term exam, quizzes and one of the either components – Class participation, Assignment, Project, Case, etc.

Course Evaluation

Sr. No. Component Weightage (%) Duration Of Nature of Examination

Examination (Open Book /Closed Book)

a) Mid Term Examination 40% 90 minutes Closed book

(not more than 40% of the total
weightage)
b) End Term Examination 40% 90 minutes Closed book
(Compulsory, not less than 30% & more
than 40% of the total weightage)
c) Quiz (Pre Mid-term – 1 and 30 minutes each Closed book
(not more than 40% of the total Post Mid-term – 1)
weightage) 20%
d) Project Assignments
(not more than 40% of the total
weightage)
e) Class Participation
(not more than 20% of the total
weightage)
f) Oral Examination
(not more than 20% of the total
weightage)
g) Take home Assignments/Tutorials
(not more than 40% of the total
weightage)

A:SuchanaBhawan, Audrey House Campus, Meur’s Ranchi-834008, Jharkhand.

P: 0651-2280083/113, 2285056 (Ext.: 126) F:0651-2280940, E: office.pgdm@iimranchi.ac.in, W: www.iimranchi.ac.in
Quizzes / Exams

The exams are designed to evaluate the student’s comprehension of material. Questions may include multiple choice types, short

answers as well as problems.

Class Preparation

Class preparation is critical to success in this course. You are expected to:

a) Read the assigned material prior to attending the class

b) Review the solved problem illustrations in the chapter/s.

c) Participate in the class to get answers to your queries.

Tutorials

Two tutorials will be held to solve additional problems in the class.

Session-wise Plan

A) Pre Mid-Term

Session Description Readings

a) Introduction to Derivatives
1 b) Mechanics of Futures Markets Chs. 1 and 2
c) Excel based – Arbitrage in Currency Forward Market

a) Hedging Strategies using Futures

2 b) Excel based – Ch. 3
i) Hedge Ratio, ii) Implied Repo Rate

a) Interest Rates
3 Chs. 4 and 5
b) Determination of Forwards and Futures Prices

a) Interest Rate Futures

4 b) Excel based – Ch. 6
i) Stock Index Futures Pricing

A:SuchanaBhawan, Audrey House Campus, Meur’s Ranchi-834008, Jharkhand.

P: 0651-2280083/113, 2285056 (Ext.: 126) F:0651-2280940, E: office.pgdm@iimranchi.ac.in, W: www.iimranchi.ac.in
 a) Excel based -
i) Hedging against an increase in interest rates using FRA
ii) Hedging with Eurodollar Futures – Single period / Multi period
5
(strip and stack hedges)
iii) Arbitrage using Eurodollar Futures
iv) Changing Portfolio duration using T-Bond Futures

Case discussion –
6
Application for Financial Futures (5 caselets)

7 Swaps / Quiz I Ch. 7

a) Mechanics of Option Markets

8 Chs. 8 and 9
b) Properties of Option Prices

a) Weiner Process and Ito’s Lemma

9 Chs. 12 and 27
b) Martingales

10 TUTORIAL I

B) Post Mid-Term

Session Description Readings

11 Option Pricing – Binomial and BSM models Chs. 11 and 13

a) Option Pricing – BSM and Heston models

12 Ch. 13, 15 and class material
b) Option Pricing – Stock index, currencies, futures options

13 The Greek Letters Ch. 17

14 Option Trading Strategies Ch. 10

15 Option Trading Strategies Ch. 10

16 Volatility Estimation and Smiles Chs. 21 and 18

17 Value at Risk Ch. 20

18 Exotic Options Ch. 24

19 TUTORIAL II

Case Discussion –
20 Goldman Sachs & Co. Nikkei Put Warrants – 1989
Quiz II

A:SuchanaBhawan, Audrey House Campus, Meur’s Ranchi-834008, Jharkhand.

P: 0651-2280083/113, 2285056 (Ext.: 126) F:0651-2280940, E: office.pgdm@iimranchi.ac.in, W: www.iimranchi.ac.in