Complete Syllabus of Financial Derivatives and Markets | FIN 687 | MBS 4th semester

Credits: 3

Lecture Hours: 48

Course Objectives:

The purpose of this course is to enable students to understand characteristics of various derivatives and analyze them to determine the prices. From this course, students are also expected to learn how derivative securities can be used in managing risks and maximizing value of a firm.

Course Description:

This course is designed to aid students in developing an understanding of the major functions,

principles and techniques of derivative markets and their respective instruments. Students will also understand the structure, pricing and valuation of option, forward, futures and swap. Various trading strategies using option and other derivatives are also covered. The course also deals with the analyses of different risks and the application of derivative instruments to hedge and mitigate these risks.

Course Details:

Unit 1: Introduction LH 4

Concept and features of derivative instruments and markets; Types of derivative instruments;

Historical overview of derivative market; Types of traders; Criticism of derivative; and Careers

in derivative market.

Unit 2: Forward and Futures Market LH 6

Forward and futures contracts; Structure of forward and futures market; Futures contract

specification; Trade mechanism; Margin operation; Clearing and settlement; and Transaction

cost and taxes; Types of trades and types of orders; Regulations; Pricing and valuation of

forward and futures on investment assets; and currencies and commodities.

Unit 3: Hedging Strategies Using Futures LH 3

Application of futures in managing risk: basic principles of hedging; Arguments for and

against hedging; Basis risk and cross hedging; and Stock index futures.

Unit 4: Structure of Option Market LH 6

Option contract: concept, type and terminologies of option; Origin and development of option

market; Position graphs of stock and option; Over-The-Counter (OTC) trading of option;

Exchange trading of options: contract specification, trade mechanism, margin operation and

settlement; Market participants; and Transaction cost and taxes.

Unit 5: Option Pricing and Properties LH 10

Basic concept of option pricing; Properties of option prices: upper and lower bounds; The

effect of difference in time and exercise price; Put-call parity; Binomial option pricing model:

assumptions, price of call and put using one-period model; Speculating and hedging portfolio

using one-period model; Pricing European call and put option using two-period binomial

model; BSM option pricing model: assumptions; pricing of European call and put; Adjustment

of dividend; and Variables affecting option price and Monte Carlo simulation.

Unit 6: Option Strategies LH 5

Covered call and protective put; Option combination: straddle and strangle; Playing the spread: bull, bear and butterfly spreads; Synthetic call and put; Application of options in hedging portfolio risk and currency risk.

Unit 7: Swap Market LH 8

Swap contract and its terminologies; Mechanics of interest rate swap; Day count issues; the

Comparative-advantage arguments; the nature of swap rates; determining LIBOR: Swap zero

rates, valuation of interest rate swaps, currency swaps, valuation of currency swaps, hedging

interest rate risk and currency risk using swap; Credit risks and Forward rate agreement (FRA).

Unit 8: Energy and Commodities Derivatives LH 3

Agricultural commodities; Metals; Energy products; Modeling commodity prices; Weather

derivatives; Insurance derivatives; Pricing weather and insurance derivatives.

Unit 9: Derivative Market in Nepal LH 3

Origin and development of derivative market; Major commodities traded; Trade mechanism of

futures exchanges in Nepal; Major participants in commodity market; Regulation of

commodity market in Nepal: Major provisions under Commodity Act 2074 and Commodity

regulation 2074; and Perspective of derivative market in Nepal.

Basic Readings:

1. Hull, J. C. & Basu, S., (2018). Options, futures, and other derivatives. New Delhi Pearson India.

2. Johnson, R. S., (2017). Derivative market and analysis. New Jersey: John Wiley & Sons

References:

1. Chance, D. M. & Brooks, R. (2016). An introduction to derivatives and risk management. New Delhi: Cengage Learning India.

2. Kolb, R. W. & Verdahl, J. A. (2010). Financial derivatives: Pricing and risk management. New Jersey: John Wiley & Sons.