Derivatives and Risk Management

Sanjay Ghimire
SOM-TU
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 Course Basics
Level: Master
Program: Master of Finance and Control (MFC)
Course title: Derivatives and Risk Management
Course code: FIN 590-2
Credit hours: 2
Total contact hours: 32 hours
Full Marks: 100
Pass Marks:50
In-semester evaluation: 50%
End-semester evaluation: 50%
Placement in the course cycle: Fourth Semester
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 Course Objective

The purpose of this course is to enable

students to understand key financial
derivatives, their pricing and markets.
The course also aims at using the derivatives
to manage financial risk of businesses.

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 Course Description
This course broadly covers various aspects of option
markets, pricing and trading strategies of stock options, and
risk management techniques using derivatives.
Major topics covered include: introduction, option markets
and properties of stock options, trading strategies involving
options, option pricing models, the mechanics of future
markets, hedging strategies using futures, swaps, and
financial risk management techniques and applications.

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 Course Contents

Unit 1: Introduction LH 2
Nature of financial derivatives
features of financial derivatives,
types of derivatives,
uses and users of derivatives,
critics of derivatives,
myths about derivatives.

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 Course Contents
Unit 2: Option Markets and Properties of Stock
Options LH 5
Types of option, option positions, underlying assets,
specification of stock options,
OTC options market and exchange-listed option
trading,
factors affecting option prices,
assumptions,
upper and lower bounds for option prices,
put-call parity.
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 Course Contents

Unit 3: Trading Strategies

involving Options LH 4
Protective put,
covered call,
straddles,
spreads,
collar.

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 Course Contents

Unit 4: Option Pricing Models LH 4

One step binomial model,
risk neutral valuation,
two-step binomial trees,
a put example,
Black-Scholes option pricing model.

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 Course Contents
Unit 5: The Mechanics of Futures
Markets LH 4
Future markets,
specification of futures contract,
convergence of future price to spot price,
daily settlements and margins,
newspaper quotes,
delivery,
forward vs. futures contract.
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 Course Contents

Unit 6: Hedging Strategies

Using Futures LH 4
Basic principles,
arguments for and against hedging,
basis risk,
cross hedging.

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 Course Contents
Unit 7: Swaps LH 4
Mechanics of interest rate swap,
the comparative advantage arguments,
the nature of swap rates,
valuation of interest rate swaps,
currency swaps,
valuation of currency swaps,
credit risks,
other types of swaps.
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 Course Contents
Unit 8: Financial Risk Management
Techniques and Applications LH 5
Importance of the risk management,
managing market risk using delta, gama and vega
hedging,
Value at risk (VAR),
managing credit risk,
perspectives of financial risk management,
derivatives mishaps and lessons.
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 Test Books and References
Basic text-books:
Hull, J. C. and Basu, S. (2010). Options, Futures, and other
Derivatives. Singapore: Pearson Education Singapore Pvt. Ltd.
Chance, D. M. and Brooks, R. (2014). An Introduction to
Derivative and Risk Management. New Delhi: Cengage
Learning India Pvt. Ltd.
References
Kumar, S.S.S. (2007). Financial Derivatives. New Delhi:
Prentice - Hall of India.
Parasuraman, N.R. (2013). Fundamentals of Financial
Derivatives. New Delhi: Wiley India.

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 Teaching Learning Strategy
The pedagogic strategy of this course will include
lectures with group and class discussions, lab works,
case study analysis and presentations; project works,
term paper, etc.
Therefore, students will be required to be actively
participating in both class and out of class activities.
All students will be encouraged to make full use of
available print and electronic resources.
Prior reading of relevant text is essential for productive
discussions in the class.
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 Evaluation

The students will be assessed through

continuous (in semester) evaluation carrying 50
percent weight and
semester-end examination carrying 50
percentage weight.

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 In-semester evaluation

In-semester evaluation is carried out in

following scheme
Attendance and class participation 20%
Home assignments 30%
Project and presentations 20%
In-Semester examinations 30%

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 Attendance and class participation

Minimum 80% attendance

Active participation anticipated
Adherence to the university code of conduct

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 Home assignments

Atleast one home assignment per chapter.

May be in form of numerical questions or
analytical one
Submission on stipulated time is anticipated.

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 Project and presentations

A comprehensive project is assigned at the

mid of the term.
Submission of the report is anticipated at the
end of the term
Each groups has to submit report and make
a presentation.
The last class is allocated for the
presentation
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 In-Semester examinations

At least one in semester examination along

with some class test.
Examination may be a closed or opened
book.
First test is conducted after completion of 8
sessions.

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 Academic Expectation

Students are suggested to be ready for:

Not to use cell phones, laptops, and any other
electronic device (except calculator) unless you
are advised to do so.
Be prepared on the topic of the sessions (pre-
reading of the text is must)
Presentation on the various related topics
Participation in Problem Solving Techniques
Logical and Analytical discussions on Case
Studies provided
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 Academic Misconduct
In accordance with rule of the university, all instances
of alleged academic misconduct will be reported to the
department chairperson.
Academic misconduct is grounds for failing the course
and may be grounds for additional sanctions.
Academic misconduct includes, but is not limited to,
indiscipline, irregularity, giving and receiving
information during an exam and submitting plagiarized
work for an academic requirement.

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