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INSTITUTE OF BUSINESS ADMINISTRATION

COURSE OUTLINE FINANCIAL DERIVATIVES

Semester: Fall 2011 Instructor: Sana Tauseef Email: sasghar@iba.edu.com Counseling Hours: Saturdays 3:30-6:00 p.m.

COURSE DESCRIPTION:

The course is intended to provide the students with a strong knowledge of derivative securities (forwards, futures, options, and swaps) and the use of these securities to manage the price risk. Students taking the course must have a solid understanding of the concepts in several fields, namely, finance and economics.

SESSION

DISCUSSION TOPIC

CHAPTER

 

Introduction

1

1

Introduction to risk and the basic Derivatives Instruments: Forwards, Futures, and Options.

 

2

Hedging, Speculation and Arbitrage. Derivatives Market in Pakistan.

Handout

 

Introduction to Futures

2

3

Margin Requirements; Marking to Market

 

4

Normal Backwardation and Contango

 

5

Orders and Position Limits. Regulations governing Cash-Settled Future Contracts (KSE Regulations)

Handout

 

Forward and Future Prices

5,4

6

Forward prices for Investment Assets

 

7

Forward Exchange Rates

 

8

Forward Commodity Prices.

 

9

Forward Interest Rates; Forward Rate Agreements

 
 

Risk Management with Future Contracts

3

10

Should the firms hedge their risk? Basis and Spread

 

11

Hedge Ratio; Index Futures; Beta Adjustment

   

12

Rolling the Hedge Forward. Case Presentation

 
 

Risk Management with Swaps

 

7

13

Interest Rate Swaps

   

14

Currency Swaps

   

15

Credit Default Swaps. Articles Presentation: Did Deregulated Derivatives cause the Financial Crises?

21

 

Introduction to Options

 

8

16

Features of Stock Options; Concept of Moneyness

 

17

Intrinsic Value and Time Value. Case Presentation

 
 

Option Pricing

 

9

18

Factors affecting the Option Prices

   

19

Pricing Restrictions for Options: upper and Lower Bounds

 

20

Call-Put Parity. Case Presentation

   
 

Option Strategies and Profit Diagrams

 

10

21

Spreads

   

22

Combinations

   

23

Profit

Diagrams

for

Option

Strategies.

Case

 

Presentation

 
 

Binomial Option Pricing Model

 

11

24

Risk

Neutrality;

One-Period

Binomial

Option

 

Pricing Model

 

25

Two-Period Binomial Option Pricing Model

   
 

Continuous Time Option Pricing Model

 

13

26

Assumptions Behind the Black-Scholes Option Pricing Model; Video Session

 

27

Black-Scholes

Option

Pricing

Formulas,

Option

17

Greeks

28

Revision of semester work, Presentations

   

TEXT BOOKS:

Required:

Options, Futures, and Other Derivatives. Seventh Edition. By: John C. Hull.

Handouts:

SBP Stability Review 2008-09. Section 7.3: Derivatives Market in Pakistan.

SBP Financial Derivatives Business Regulations.

KSE Regulations: Regulations governing Cash-Settled Future Contracts.

Recommended:

Derivatives: Valuation and Risk Management. By: David A. Dubofsky and Thomas W. Miller, Jr.

Derivatives Market. By: Robert L. Mc. Donald.

ASSIGNMENTS:

1. Case Study Presentation: Since the mid-1980, there have been some huge losses

incurred from the inappropriate use of derivative instruments. Each group will select one case (either a financial institution or a non-financial institution) and submit a write up covering the following points:

Explanation of strategies and transactions involved.

What went wrong? How was the loss accumulated?

Who was responsible for the loss?

What lessons are to be learned from the case/disaster?

Case Selection: 3rd session (A list of the institutions incurring losses is given in the

course book, chapter 32: Derivatives Mishaps) Source: Secondary Page Limit: 2-5 pages Due Date: 8 th session

2. Topic Presentation: Each group will select a topic from our (Pakistan’s) derivatives

market. It could be a particular instrument market or the derivatives transactions executed by an Authorized Derivative Dealer (financial institution). Topic Selection and Approval: Till the 8th session (No assignment will be accepted without prior approval of the topic) A 1-page write up is to be submitted on the 8 th session indicating the issues or areas that will be covered in the assignment.

Source: Primary and Secondary Page Limit: 4-10 pages Due Date: 1 st session after the second term (21 st session)

COURSE REQUIREMENTS:

Students must bring text book in the class. The supplementary materials will be handed out in the class.

It is anticipated that students prepare the topics in advance to be ready for the discussion and quizzes.

Active class participation will be rewarded by adjusting the grade upwards when it is on the margin.

Since subsequent topics build on previously learned material, it is imperative that students keep up with the material. In addition, students should ensure that lectures are understood properly.

A student who misses a class is responsible for obtaining any handouts and information on course content, assignments, due dates, test dates, etc.

Financial calculator is necessary in the class.

The quizzes may be in advance or from the previous topic. There will be a perfect zero if you miss the quiz.

You are expected to complete the assignments on the due date. No excuses will be entertained in late submission unless there is some extreme case.

GRADING:

The course grades will be based on:

Terms

40%

Final

35%

Quizzes (n-1)

10%

Assignments and Presentations

10%

Class Participation

5%