Pailan College of Management and Technology M.B.

A Division
Lessons Plan 4TH Semester 2012 2013 DERIVATIVES & RISK MANAGEMENT (Module 2, 3, 4, 5, 6) Faculty Course Title Course Code Objective of the subject Teaching ABHIJIT PAL DERIVATIVES & RISK MANAGEMENT FM-406 The developments in derivatives have been rapid and their acceptance as tools of hedging and other applicants has been increasing.With increased sophistication both in terms of trading and newer instruments, it has become imperative to understand the risk associated with trading and investing.For better risk management,a thorough undestanding of conceptual framework of working of the instruments,their purpose and pricing is needed.

Black board, Class exercises, Assignments, practical and cases. Methodology Assessment of the Students will be on the basis of the following weightage :1. End Term Exam 2. Attendance 3. Assignment 4. Mid Term. I Exam 5. Mid Term. II Exam Total Text Books Reference books Course Duration Time per Lecture 70 5 5 20 20 best of two

100 Marks OXFORD,RAJIV SRIVASTAVA. DERIVATIVES & RISK MANAGEMENT

Stulz: Risk Management & Derivatives, Thomson Learning Varma: Derivatives and Risk Management, Tata McGraw-Hill Financial Management, I.M.Pandey

40 lectures. 1 hour each

Module 2.

Topic
Introduction-

Detailed of Course to be covered

- Forward contracts, Futures contracts, Options and other derivatives

No. of Lectures.

1.1 What do you understand by risks and what are the different ways of classifying and managing them? 1.2 What are the various kinds of business risks? 1.3 What is a derivative? Define. 1.4 Define four different types of derivatives.

2 1.5 What are the differences between exchange traded and over-the-counter derivatives? 1.6 What are different underlying assets on which derivatives exist? 1.7 What are the functions and criticisms of derivatives?
i

Webs Resources

Module 3

Topic
Forward and Futures

Detailed of Course to be covered

Markets; use of futures for hedging; Risk Management Using Futures and Forwards; pricing- Cost of Carry Model; interest rate futures

No. of Lectures
10L

Assignment Question 1. What do you understand by forward contract? Illustrate with an example. 2. What are the merits and demerits of forward contract? 3. How are forward contracts settled? Illustrate. 4. What are the advantages of futures contract over forward contract? 5. What are possible modes of settlement of futures contract? 6. What are key specifications parameters of a futures contract? 7. What is the difference in open interest and volume? 8. Describe marking-to-market by a suitable example. 9. Explain cash-and-carry and reverse cash-and-carry arbitrage. 10. How would you value a forward contract once it is is entered? 11. What is convergence? Explain backwardation and contango.

Module 4
Options

Topic

Detailed of Course to be covered

Markets; Payoffs; Risk Neutral Valuation; Binomial Option Pricing Model ; Black Scholes Option Pricing Model; Put Call Parity; Uses of Options; Option Strategies

No. of Lectures

12L

Assignment Questions 1. What do you understand by option contract? Illustrate with an example. 2. Explain features of an option. 3. How are option contracts settled? Illustrate. 4. What are the advantages of options over forward/futures contract? 5. What is the difference in payoff of long position on an asset and the call option on the same? 6. What are key specifications parameters of an options contract? 7. Describe binomial model of valuation of options. 8. What do you understand by risk neutral valuation? 9. What is equivalent portfolio approach to value options and how is it different from risk neutral valuation? Explain. 10. What are the assumptions of the Black-Scholes model? 11. How does the Black-Scholes model change to incorporate valuation of options on (a) dividend paying stock, (b) indices, and (c) currencies? 12. What is the difference in historical volatility, future volatility, and implied volatility? Module 5
risk

Topic
Management of market

Detailed of Course to be covered

Stop loss; Delta hedging; Theta; Gamma; Vega; Rho; Scenario Analysis; Portfolio insurance, Var

No. of Lectures 8L

Assignment Questions 1. 1 What do you understand by sensitivities of option prices? Describe all the parameters and their importance. 11.2 What do you understand by delta of an option? Describe its behaviour with respect to spot price and time to maturity. How is it measured for call and put options? How do you find the delta of a portfolio? What is delta neutrality and delta hedging? Describe with the help of an example. 11.4 What do you understand by time decay of option? 11.5 What is gamma of an option and why is its study important 0 Option Value and Delta The value of 3-m at-the-monev European call option on an asset whose current price is Rs 100 in terms of the Black-Scholes model is expressed as follows: Call value c= 100 x 0.5678 - 100 x 0.9901 x 0.5382 (a) What is the expected change in the value of the call if spot value goes up to Rs 102? (b) What is the expected change in the value of the put if the spot value moves to Rs 105? Delta of Options 1. Find the value of delta of at-the-money call and put options with three months to expire. The volatility of the underlying stock is 40% and risk-free rate is 8%. 3 Gamma of Call and Put For the spot price of Rs 100 find the value of the gamma of the call and put option for the data given in Problem 11.2. P 11.4 Delta Neutrality 1. Refer to the data of Problem 11.2. If you are holding 10,000 shares what would you do to make it delta neutral using only call options, and using o.nly put options? Module 6 Topic
Other derivatives Swaps, Warrants, Convertibles

Detailed of Course to be covered

No. of Lectures 4L

Assignment Questions 1. Describe features of an interest rate swap. 2. How would you convert a floating rate liability into a fixed rate liability using swap? Draw a schematic diagram to explain your answer. 3. If an enterprise has invested funds in securities providing floating rate of income, what risk does it face? How-would you hedge such risk using an interest rate swap? 4. What are the problems in arranging a swap and how are they overcome by swap intermediary/bank? 5. Explain hedging of fixed rate and floating rate loans using swap. 6. What is a currency swap and how is it different operationally from an interest rate swap? 7. Currency swaps can be used to convert assets/liabilities from one currency to another. Explain with a suitable example. 8. How are currency swaps and interest rate swaps used for reducing cost?

Module 7

Topic
Risk Management in Financial Institutions

Detailed of Course to be covered

Overview of BASEL II, Market Risk, Credit Risk and Operational risk elements

No. of Lectures 4L

Assignment Questions 1. Discuss the market risk? 2. Discuss the credit risk? 3. Discuss the operational risk Case Study should be provided to the students on selective Chapters as per the progress of the of the students.