Financial Derivatives

IILM - Trimester IV – 2023-24

Course description in brief:

The objective of this course is to introduce participants to derivative securities with particular focus on the structure
of these contracts, their use in risk management, and techniques used for their valuation.

1. General Course Information

1.1 Course Details

Course: Financial Derivatives

CodeFD

Term: Trimester IV

Level: Postgraduate

Credits: 3

Contact: Up to 3 classroom sessions of 1 hour 15 minutes

Prerequisites: Financial Accounting and Financial Markets

1.2 Course Faculty

Module Leader: Dr. Saima Rizvi

Module Tutor: Dr. Saima Rizvi

1.3 Class and tutorial details:

Classes for this course shall be scheduled thrice a week. Tutorial sessions shall also be conducted for this course in
due time.

2. Learning Outcomes

2.1 Course Learning Outcome

By the end of this course, you/students should be able to:

1. Understand the concepts of forward and futures contracts, and how to price them using no-arbitrage principle.
2. Price options using the Black-Scholes formula
3. Design and implement derivatives trading strategies
4. Understand the concept of Option Greeks
2.2 Course learning outcomes, program learning outcomes and assessments:
Course learning outcomes
Understand the concepts of forward
and futures contracts, and how to price
them using no-arbitrage principle.
Price options using the Black-Scholes
formula
Design and implement derivatives
trading strategies
Understand the concept of Option
Greeks
2.3 Relationship of this course with other courses conducted in the
Program learning outcomes Assessments
L 2: An ability to acquire, analyze and
Assignment and End
understand data and information for
Term
managerial decisions
L 2: An ability to acquire, analyze and
understand data and information for
managerial decisions
Assignment and End
Term
L 3: Critical thinking and informed judgment
leading to problem solving, decision-making
and negotiating skills
L 2: An ability to acquire, analyze and
Quiz, Assignment and
understand data and information for
End Term
managerial decisions
L 2: An ability to acquire, analyze and
understand data and information for
managerial decisions
Assignment and End
Term
L 3: Critical thinking and informed judgment
leading to problem solving, decision-making
and negotiating skills
Same term: This paper will complement Fixed Income Securities elective course in the same term. The course on
fixed income security will cover Bond Portfolio Management and Terminology related to Bond Market and Fixed
Income Securities. Equity Investment Analysis is also one module that will complement

3. Learning Resources

3.1 Required resources

-Options Futures and Other Derivatives, John C Hull, 9e, Pearson Education, 2015

1. Recommended resources

-Derivatives and Risk Management Basics, Chance and Brooks, Indian Edition, Cengage Learning

-Derivatives: Valuation and Risk Management, Dubofsky and Miller

-Reilly & Brown, Investment Analysis and Portfolio Management, Cengage Learning

1. Online resources

Option price calculator:

http://www.option-price.com/

https://www.bseindia.com/markets/Derivatives/DeriReports/OptionCalculator.aspx

Credit Derivatives (if you feel interested)

https://www.bloomberg.com/news/articles/2018-06-05/how-a-twist-on-credit-derivatives-warps-the-market-
quicktake

Credit Default Swaps

https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities#credit-default-
swaps-tut

Collateralized debt obligation overview

https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/cdo-
tutorial/v/collateralized-debt-obligation-overview

https://www.motilaloswal.com/markets/derivative-market.aspx

https://www.isda.org/
https://www.risk.net/derivatives

https://economictimes.indiatimes.com/topic/derivatives-market

https://zerodha.com/varsity/

https://www.bloomberg.com/asia

https://www.optionstrading.org/

https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities

4. Learning and Teaching Activities:

Approach to Learning and Teaching in the Course

This course emphasizes on both the acquisition and application of knowledge. It is believed that learning occurs
most effectively when theory is taught in conjunction with application. This is reflected in the way we go about in
this course by combining conceptual knowledge about their application in management (decision making). Timely
feedback from you will help us in making learning more outcome centric and interesting. We encourage you to
actively take responsibility for your own learning and to critically evaluate the concepts presented.

Learning Activities and Teaching Strategies

The delivery is designed to convey theoretical and practical knowledge. The lectures/discussions will be presented in
both online and offline mode and recorded each week. If you cannot attend the lecture you should make sure to
listen to the lecture recording prior to the next class or your tutorial for that week. The tutorials involve problem
solving and discussions to enable transfer of skills to the world of work. In class participation is one of the most
important contributors to learning and understanding. You are expected to participate in cases/discussions and
prepare well before the class.

1. Module overview:

Learning Activities in
Session Topic to be covered Pre-readings.
Session

Chapter 1, Introduction, Options, Futures

and Other Derivatives, John C.Hull and
Sansakaran Basu, 10 Edition
Introduction to
Derivatives-Forward,
Futures, Options and https://www.forbes.com/advisor/investing/der
Swaps ivatives/

1-2 Overview of Indian Discussion

Derivative Market
https://corporatefinanceinstitute.com/resourc
Types of Traders- es/derivatives/derivatives/
Hedgers, Speculators
 and Arbitrageurs

Futures Market

Background,
Specifications,
Convergence of
Chapter 2, Introduction, Options, Futures
Futures Price to Spot Discussion and Excel
3-4 and Other Derivatives, John C.Hull and
Price, Operation of Problem Solving
Margin Account, Sansakaran Basu, 10 Edition
Types of traders and
Types of Orders,
Forward versus
Futures Contracts

Hedging Strategies
using Futures

Basic Principles, Chapter 3, Introduction, Options, Futures

Discussion and Excel
5-6 Arguments for and and Other Derivatives, John C. Hull and
against hedging, Problem Solving
Sansakaran Basu, 10 Edition
Basis Risk, Cross
Hedging, Stock Index
Futures

Determination of
Forward and Futures
Prices

Investment versus
Consumption Assets
Chapter 5, Introduction, Options, Futures
Discussion and Excel
5-6 and Other Derivatives, John C. Hull and
Short Selling Problem Solving
Sansakaran Basu, 10 Edition
Assumptions and
Notations, Valuing
Forward Contracts,
Are forward and
futures prices equal?

Mechanics of Options
Markets Chapter 10, Introduction, Options, Futures
and Other Derivatives, John C. Hull and
Types of Options, Sansakaran Basu, 10 Edition Discussion and Excel
7-9
Option Position, Problem Solving
Underlying Assets,
Specification of Stock https://www.nseindia.com/option-chain
Options,
 Properties of Stock
Options

Factors affecting
option prices,
Chapter 11, Introduction, Options, Futures
Assumptions and Discussion and Excel
10-11 and Other Derivatives, John C. Hull and
notations, Upper and Problem Solving
Sansakaran Basu, 10 Edition
Lower Bounds for
option prices, Put Call
Parity, Calls on a non-
dividend paying stock,
Puts

Trading Strategies
involving options
Chapter 12, Introduction, Options, Futures
Principal Protected Discussion and Excel
12-15 and Other Derivatives, John C. Hull and
Notes, Trading an Problem Solving
Sansakaran Basu, 10 Edition
Option, Spreads,
Combinations, Other
Payoffs

Black Scholes
Merton Model Chapter 15, Introduction, Options, Futures
Discussion and Excel
16-17 and Other Derivatives, John C. Hull and
Black Scholes Problem Solving
Sansakaran Basu, 10 Edition
Formula

Discussion and Excel

Problem Solving
Chapter 19, Introduction, Options, Futures
The Greek Letters and Other Derivatives, John C. Hull and
Sansakaran Basu, 10 Edition
Delta, Theta, Gamma
18-19
and their
relationships, Vega
and Rho https://www.niftytrader.in/option-pricing-
calculator

Chapter 7, Introduction, Options,

Swaps Futures and Other Derivatives, John
C. Hull and Sansakaran Basu, 10 Discussion and Excel
20-21 Interest Rates Swaps Edition
Problem Solving
Currency Swaps CASE: Arvind Mills Limited: Dollar-Rupee
Swap
 Options on Stock Chapter 7, Introduction, Options, Futures
Discussion and Excel
22-23 Indices and and Other Derivatives, John C. Hull and
Problem Solving
Currencies Sansakaran Basu, 10 Edition

Chapter 25, 26, 35, 36, Introduction,

Options, Futures and Other Derivatives,
Credit Derivatives,
Real Options, John C. Hull and Sansakaran Basu, 10
Exotic Options, Edition Discussion and Excel
24
Energy and Problem Solving
Commodity
Derivatives
CASE: Goldman Sachs: ABACUS 2007-
AC1

5. Assessments:

5.1 Assessment summary

Assessment Item Due date Weighting Related learning outcome

1.Assignment 1st week 20 marks L2 and L3

2.Quiz 1 2nd week 10 marks L2

3.Quiz 2 4th week 10 marks L 2 and L 3

4.Quiz 3 6th week 10 marks L 2 and L 3

6. End term Assessment 50 marks L2 and L3

5.2 Assessment related details

If a student is absent on the scheduled date of (internal) assessments, she/he shall be awarded zero.
End term assessments are compulsory. Absence in end term assessments will be marked as ‘absent’ and the
result will be marked as ‘incomplete’. This is irrespective of the student’s score in internal assessments.
5.3 Assessment details

Component 1: Quizzes (30%)

Component 2: Assignment (20%)

-Track the Nifty Index Options and Compare it with Nifty Index Values during the same period. Also, evaluate the
Payoff, Profitability and Breakeven.

-Track Infosys Call and Put Option and their Prices at different Strike Prices and Compare it with Infosys Stock.
Also, evaluate the Payoff, Profitability and Breakeven.

Component 3: End Term (50%) A pen and paper-based End-Term examination will be conducted at the end of the
course. The end term exam will be closed book and have three to five questions to answer to. There will be no
choices. You may face a direct question or you may be given a small case to study before or during the examination,
or a news item to analyze or a combination of the above.

5.4 Details of submissions/presentations

As mentioned above in 5.3

5.5 Assessment Feedback

Feedback on student performance from formative and summative assessment tasks will be provided to students in a
timely manner. Assessment tasks completed within the teaching period of a course, other than a final assessment,
will be assessed and students provided with feedback, with or without a provisional result, within 10 working days
of submission, under normal circumstances. Feedback on continuous assessment tasks, if any, will be provided prior
to the midpoint of the course.

Note: Appeal of grade – students who wish to appeal their end term marks should initially discuss their concerns
with their tutor. If they are still dissatisfied they should then make contact with the Controller of Examination
within working business days from the date of notification of the result. Such a written request must contain details
of the grounds on which the objection is based. Requests must include a summary of the reasons the student
believes his or her assessment work deserves a higher mark. These reasons must be directly related to the academic
quality of the work.

5.6 Quality Assurance

IILM is actively monitoring student learning and quality of the student experience in all its programs. A random
selection of completed assessment tasks may be used for quality assurance, such as to determine the extent to which
program learning goals are being achieved. The information is required for accreditation purposes, and aggregated
findings will be used to inform changes aimed at improving the quality of Business School programs.

6. Maps:
6.1 Assessment Map

Module Name: A1 A2 A3 A4 A5

Financial Derivatives
Yes Yes Yes

A1- Individual assignment/quiz A2- Group assignment

A3- Open book examinationsA4- Closed book examinations A5- Presentations

6.2 Teaching Map

Module Name: T1 T2 T3 T4 T5 T6

Financial Derivatives
Yes Yes Yes Yes

T1: Lectures T2: Seminars/TutorialsT3: Projects

T4: Case DiscussionT5: Guest Lectures/Industrial VisitT6: Workshop Sessions

6.3 Curriculum Map

Module Name: Program learning outcomes

Financial Derivatives
L1 L2 L3 L4 L5 L6 L7

Taught Yes Yes Yes

Assessed Yes Yes

Covered Yes Yes

Program Learning Outcomes:

•L1 - An understanding of organizations and management techniques to allow investigation into business and
management issues.

•L2 - An ability to acquire, analyze and understand data and information for managerial decisions.

•L3 - Critical thinking and informed judgment leading to problem solving, decision-making and negotiating skills

•L4 - Cognitive flexibility which enables adaptability to uncertainty in a rapidly changing business environment

•L5 - An understanding of disruptive and technological change and the ability to seek innovative and
entrepreneurial solutions.

•L6 - Emotional intelligence and people’s skills in communicating, working in teams and with people.

•L7 - Being cognizant of the impact of individual and corporate actions on society, recognizing responsible and
inclusive business practices and sensitivity to the social, economic and environmental responsibilities of business.

7. Student feedback

The Institute places high priority on approaches to learning and teaching that enhances the students’ experience.
Feedback is sought from students in a variety of ways including on-going engagement with faculty, the use of online
questionnaires and interaction with the Dean/appropriate authority. This course is regularly revised and updated to
reflect student feedback.

10. Student Responsibilities and Conduct

Students are expected to be familiar with and adhere to Institute's policies in relation to class attendance and general
conduct and behaviour, including maintaining a safe, respectful environment; and to understand their obligations in
relation to workload, assessment and keeping informed.

Workload: It is expected that you will spend at least ten to twelve hours per week studying for a course. This time
should be made up of reading, research, working on exercises and problems, online activities and attending classes.
In periods where you need to complete assignments or prepare for examinations, the workload may be greater. We
strongly encourage you to connect with your MS Teams Portal in the first week of semester.

Attendance: Your regular and punctual attendance at lectures and seminars or in online learning activities is
expected in this course. The Institute reserves the right to refuse final assessment to those students who fails to
attend the required minimum number of classes where attendance and participation is required as part of the
learning process (e.g., tutorials, flipped classroom sessions, seminars, labs, etc.).

General Conduct and Behavior: You are expected to conduct yourself with consideration and respect for the needs
of your fellow students and teaching staff. Conduct which unduly disrupts or interferes with a class, such as ringing
or talking on mobile phones, is not acceptable and students may be asked to leave the class.

Keeping Informed: You should take note of all announcements made in lectures, tutorials or on the course web site.
From time to time, the Institute will send important announcements to your university e-mail address without
providing you with a paper copy. You will be deemed to have received this information. It is also your responsibility
to keep the Institute informed of all changes to your contact details.