STUDY - FINANCIAL DERIVATIVES
The course aims to develop an understanding of the importance of financial derivatives and the institutional structure of the markets on which they are traded as well as developing the analytical tools necessary to price such instruments. The course will have three main parts: ?First, the most commonly traded derivative instruments will be introduced, and their role in the modern capital markets, in particular for risk management, explained both from a theoretical as well as practical point of view. Second, there will be discussion on the institutional structure of the markets, on which such instruments are traded. Third, the pricing of the derivatives instruments and the risk characteristics of derivatives will be discussed.
Definition of Derivative Securities- Brief history of derivatives, Evolution of Commodity, Currency, Stocks and Interest Rate Derivatives, Structure of derivative markets, forwards, futures, options, swaps etc.Examples of more sophisticated derivatives: barrier options, compound options, options on futures, swaptions, Underlying assets: equities, currencies, commodities and interest rates. Reasons for trading: risk management, speculation and arbitrage.
Market Characteristics- Futures and Options contract specifications, underlying asset, contract size, and delivery specifications. Marking to market using margin accounts. Familiarizing with market quotes. Trading Strategies involving Options and Futures. Interest rate derivatives, Contractual specification: floating and fixed rate. Valuation of interest rate derivatives.
Derivatives Pricing Theory- Option Pricing: Black-Scholes formula for option pricing: derivation and properties. Volatility: estimated vs. implied, options on dividend-paying assets, warrants and convertibles. Binomial models for option prices: definitions and terminology. Continuous-Time Models. Futures Pricing: Pricing by arbitrage: relationship between futures and spot price (cost of carry and reverse cost of carry), difference between futures and forward price, futures on dividend-paying assets.
Risk Analysis and Management- Risk Measurement and Management Framework, Option's delta, gamma, Vega, theta, rho. Hedging with futures. Derivatives Disclosure: Accounting Issues in Derivatives.
Options and Futures Applications in India- Structure of Indian stock markets and the operational efficiency of options and futures, determination of the fair value of futures and options prices, Interactions between spot equity trading and trading in derivatives.
MBA Finance Subjects