OFS-X08

OFS-X08
(PGDM-PT 2008-11 : Term-VIII)

Options, Futures & Swaps
(Faculty: Prof. B.P.MISHRA)

COURSE OUTLINE

COURSE OBJECTIVE

The Course objective is to understand the application of Derivatives in Speculation (Various trading strategies) & Risk Management.(Risk reduction & Hedging).This would involve an in-depth study of the basic properties of options; put call parity (relationship between put & call option prices); risk - neutral approach to valuation of derivatives, starting from Binomial Model and leading to the famous “Black & Scholes” pricing model on option valuation. Derivatives are subject not only to the risk of underlying asset but also to the other risks (known as option Greeks). One of the very important objectives of the course is to understand the “Greeks” for various Directional & Volatility” based option strategies. Further , the course would also deal with interest rate and forex swaps which are important interest rate and foreign exchange risk management tools. A fair idea of Indian derivative market will be covered

PRE –REQUISITES

Basic Calculus

Students with non-engineering background need not worry, as the basic would be covered while doing the course. The course does involve Mathematics. More than the mathematics, it’s important to understand the economic rationale behind the concepts and it’s application for financial decision making.

CAREER OPPORTUNITIES

1. Securities Trading Companies (Derivatives Trading, Institutional selling & Arbitrage)
2. Portfolio, Wealth Management /Mutual Funds

(Derivatives are an integral part of Fund Management Business. FIIs use them extensively, however the Domestic Mutual Funds are permitted to use derivatives only for Hedging.)

3. Treasury Operations in Corporates /Banks.

(While the course focus is on stocks derivatives the principle underlying the valuation and application for Forex derivatives are the same.)

4. Corporate Finance (Issue of Hybrid –Securities like Convertible Debentures)

(A Convertible Bond is a combination of a plain bond and equity option. Therefore valuation of the convertible bond requires knowledge of option.)

REFERENCE BOOKS
1. Options, Future & Other Derivatives – by John. C.Hull (7th ed )
2. Applied Derivatives – Richard .J. Rendleman, Jr
3. Option Volatility & Pricing – Sheldon Naten Berg
4. The New Options Market – Max Ansbacher
5. Derivatives – The Wild beast of Finance – Alfred Steinherr
6. Derivative- Valuation & Risk management –D.A.Dubofsky & T.W.Miller
7. Risk Management & Derivatives ---Rene’ M Stulz
8. Option, Futures Markets: - Theory & Practice Sunil K Parameswaran

EVALUATION PATTERN

Class participation	10%
Quiz 2	40%
Final Comprehensive Examination	50 %

COURSE OUTLINE

Sr.no	Topics	Readings	Sessions
1	Introduction to Derivatives v Application of Derivatives – for Risk Management & Speculation (Leveraging) v Basic Terms & properties of Options / Futures / Forwards		1
2	Futures & Forwards v Pricing & Valuation of Futures/Forwards v Risk Management using Futures v Basis Risk v Introduction to Currencies /Commodity/Interest rate futures	Chapter 2 – 3 from HULL	3
3	Mechanics & Properties of Options v Boundry Conditions for options v Put-call parity and its interpretation v Options sensitivity to the o Underlying o Volatility o Strike price o Interest rate o Time to expiration	Chapter 7 & 8 from HULL	2
4	Basic Option strategies Trading 1. Directional Strategies (A naked Call/Put/Bull Call/Spread etc. 2. Volatility based strategies (Straddle/Strangle /Calendar Spread) 3. Economic Rationale behind spreading Risk Management 1. Protective Put 2. Covered Call	Chapter 9 from HULL	2
5	Introduction to Option Valuation 1. Binomial Model for Valuation 2. Risk Neutral probabilities and their interpretation 3. Binomial Model’s application for American options where the underlying pays the dividend	Chapter 10 from HULL	2
6	Black & Scholes Model · Understanding Weiner& Markov processes · Log – Normal distribution · ITO – LEMMA & its application in Stochastic processes · Using ITO – LEMMA – to derive Black & Scholes Model for stock /currency options · Interpreting the B & S formula · Seeing Options sensitivity to different variable using Excel	Chapter 11,12,13 from HULL	2
7	Understanding Options Greeks · Delta/Theta/Vega & Gamma risks of options · Understanding option Greeks for various trading strategies (volatility & Directional Spreads) · Delta /Dynamic Hedging and relating the cost of Delta hedging with the option price determined by Black & Scholes – Model. · Elasticity (Beta) of an option in the CAPM framework. This would “clarify” the “risk return” profile (which is often misunderstood for various options trading strategies)	Chapter 14 from HULL	2
8	Options Volatility · Historical & Implied Volatility · Volatility Smile · Term Structure of Volatility · Some advance Models of volatility estimation	Chapter 15 from HULL	1
9	Foreign Exchange and Interest rate Swaps · Basic Features & Application in Risk Management · Valuation Principles ·Complex swaps and their valuation		3
10	Indian Derivative Market Products , Institutions Problems & challenges		2

Created By: Bijoy Kar on 08/10/2010 at 01:00 PM
Category: ExPGP-III Doctype: Document

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