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FIN306
Derivative Securities and Risk Management
Valliappan Kasi
Telephone
Fax
Room
Email
03-20961511
03-20957063
12, KPD Block B, Level 4
valliappank@help.edu.my
Class Contact
Consultation
PRE-REQUISITE(S)
FIN203
FIN 204
OBJECTIVES
After completing this subject you should be able to:
demonstrate an understanding of the structure and pricing of the risk management product set forward contracts, futures contracts, options, swaps as well as other derivative products.
identify and measure financial exposures, and assess the impact of these exposures on the value
of the corporate organisation.
recommend an appropriate risk management strategy given the objectives of the company, and
construct specific hedges and hedge combinations that meet the objectives of the company.
describe the functions of a contemporary corporate treasury operation, and discuss common
treasury management pitfalls that may arise within the treasury structure.
TEXTBOOK
Hull, J. Options, Futures, and other Derivatives, 2009, 7th edition, Pearsons/Prentice Hall, New Jersey.
RECOMMENDED READING
Hull, J., Fundamentals of Futures and Options Markets, 2008, 6th edition, Pearsons/Prentice Hall, New Jersey.
McDonald, RL., 2006, Derivatives Markets, 2nd edition, Pearson Education, Boston.
Daugaard, D & Valentine, T., Financial Risk Management: A practical approach to derivatives: A users
guide for fund managers and corporate treasurers, 1995, Harper Education, Sydney.
Smithson, CW 1998, Managing financial risk : A guide to derivative products, financial engineering,
and value maximization, 3rd edn , McGraw-Hill, New York .
Galitz, L 1995 , Financial Engineering : tools and techniques to manage financial risk, Pitman,
London .
Smith, C , Smithson , C & Wilford , D 1995 , Managing Financial Risk : A guide to derivative
products, financial engineering and value maximization , Irwin Professional Publisher , Burr Ridge , Ill
WEB REFERENCES
www.bankersworld.com
www.imf.org
www.news.ft.com
www.fortune.com
www.msnbc.com
www.guardian.co.uk
www.euromoney.com
www.wsj.com
: Business Studies
Lecturer
: Mr Valliappan Kasi
WEEK
LECTURE TOPIC
TEXTBOOK &
READINGS
Readings 1,2 & 3
Hull, Chapter 1
McDonald, Chapter 4
Hull, Chapter 4
2
3
5
6
10
11
12
Value at Risk
Hull, Chapter 20
McDonald, Chapter 25
13
14
Reading 6
ASSESSMENT
There are three assessment items for this subject.
Assessment Items
Value
Due Date
1. Assignments (4 questions)
15%
15%
70%
To be determined
REQUIREMENTS
To gain a pass in this subject, students must:
Achieve a passing grade in the final examination ie. score a minimum of 35% out of 70%.
Attempt ALL the other areas of assessment; and achieve a total result of 50% or better overall.
ITEM 1: Assignments
15%
Rationale
The assignment requires each student to attempt four questions which will requires knowledge of the various
issues discussed during lectures and tutorials. It will also allow the students to be resourceful and apply that
which they have studied in this course.
Assessment Task
Due date:
Topics covered:
Word limit:
Week 1 to week 9
2,500 words maximum, excluding tables and appendices. All parts carry
equal weighting.
QUESTION 3
(30 marks)
Vilas Plc. expects to receive royalty payments totaling 1.25 million next month. It is interested in protecting
these receipts against a drop in the value of the pound. It can sell 30-day pound futures at a price of $1.6513
per pound or it can buy pound put options with a strike price of $1.6612 at a premium of 2.0 cents per pound.
The spot price of the pound is currently $1.6560, and the pound is expected to trade in the range of $1.6250 to
$1.7010. Vilas's treasurer believes that the most likely price of the pound in 30 days will be $1.6400.
a)
How many futures contracts will Vilas need to protect its receipts? How many options contracts?
(10 Marks)
Question 4 (30 Marks)
a)
The spot price of the market index is $900. After 3 months the market index is priced at $920. The
annual rate of interest on treasuries is 4.8% (0.4% per month). The premium on the long put, with an exercise
price of $930, is $8.00. Draw the payoff graph for the long put position at expiration. Include strike price,
breakeven price, and max loss, with an explanation each. (10 Marks)
b)
Develop the payoff table for the previous question, using at least five different possible index prices,
in addition to the strike price and breakeven price.
(10 Marks)
c)
Why are managerial controls over option and forward trading departments vital to proper
risk control? ( support your answer with real examples)
(10 Marks)
15%
Rationale
This will cover the first half of the course and will be a closed book exam. The date for the test has tentatively
been set on 11 April 2011 subject to confirmation.
Assessment Task
30 Multiple choice questions
Assessment Criteria
The test will cover topics covered from week1 to week 6
70%
This will be of three hours duration, and will cover all topics studied in the subject.
The exam may consist of any combination of case study, multiple choice questions, short answer questions or
essay questions. It will be a closed book exam. The date for the exam has not yet been timetabled. When this
has been done, you will be advised.
5. Newspaper articles
6. Magazines
7. Websites
8. Study guide
Students are advised to cite in the following cases [1]:
1. When he/she quotes two or more words verbatim, or even one word if it is used in a way that
is unique to the source
2. When he/she introduce facts that he/she have found in a source
3. When he/she paraphrase or summarize ideas, interpretations, or conclusions that he/she find
in a source
4. When he/she introduce information that is not common knowledge or that may be considered
common knowledge in your field, but the reader may not know it
5. When he/she borrow the plan or structure of a larger section of a sources argument (for
example, using a theory from a source and analyzing the same three case studies that the
source uses)
6. When he/she build on anothers method found either in a source or from collaborative work
in a lab
7. When he/she build on anothers program in writing computer code or on a not-commonlyknown algorithm
8. When he/she collaborate with others in producing knowledge
In general, a referencing system requires two parts:
1. In-text citations
This is information about a source within the text of an assignment.
2. List of references
This is a list of all sources a student has used to research his/her assignment. It is
alphabetically arranged by author surname and appears immediately after the last page of an
assignment.
Different faculties or departments may have different requirement on how referencing for an
assignment should be done. The various formats used for in-text citations and list of references are
available in the following websites:
1. Harvard System (http://www.adelaide.edu.au/library/guide/gen/harvard.html)
2. Chicago Style (http://www.chicagomanualofstyle.org/index.html)
3. American Psychological Association or APA Style (http://www.apastyle.org)
4. Modern Language Association of America or MLA Style (http://www.mla.org)
Once a student has selected a referencing style for his/her assignment, he/she must follow the same
style consistently throughout the assignment. We strongly suggest that the
student consults the lecturer/tutor about which method to use before submission of his/her
assignment.
What are the Procedures and Penalties for Plagiarism?
When a lecturer/tutor encounters a possible case of plagiarism, the lecturer/tutor shall report the
matter to the Head of the Department, who then initiates an investigation on the matter. The
following procedures would be carried out:
1. The lecturer/tutor shall provide evidence that substantiates an academic offence has
occurred. The following documentations must be ready prior to reporting of alleged
plagiarism:
1
2.
3.
4.
5.
6.
7.
8.
Possible penalties for plagiarism range from mark reduction for the assignment to expulsion from the
University. The student will not be allowed to make up the assignment. If plagiarism has been found
to have occurred, the Department will take action(s) as determined by the forms of plagiarism
implicated:
1. Complete plagiarism
Verbatim copying another persons work without acknowledgement
1st offence : A grade of F in the subject and a warning letter will be issued
2nd offence : Expulsion from the University at the discretion of the Head of
Department
2. Substantial plagiarism
Near-verbatim copying another persons work by simply altering the order of the sentences or
the format of presentation or by changing a few words or phrases without acknowledgement.
1st offence : Zero mark on the assignment and a warning letter will be issued
2nd offence : A grade of F in the subject and a warning letter will be issued
3rd offence : Expulsion from the University at the discretion of the Head of
Department
3. Minimal plagiarism
Acknowledgement is made but paraphrasing by changing and/or eliminating some words
1st offence : Deduction of 50% of available marks on the assignment and a
warning letter will be issued
2nd offence : A grade of F in the subject and a warning letter will be issued
3rd offence : Expulsion from the University at the discretion of the Head of
Department
4. Unintentional plagiarism
BACHELOR OF BUSINESS
SAMPLE FINAL EXAMINATION
Subject Code
Subject Name
FIN306
This examination carries 70% of the total assessment for this subject.
Examiner(s)
MR VALLIAPPAN
KASI
Moderator(s)
Internal :
External :
Day
Date
:
:
Time :
Time allowed :
Reading 10 MINUTES
Writing 3 HOURS
INSTRUCTION(S):
1.
This examination consists of eight (8) questions. Total marks for all questions add up to 100.
Students are required to answer ALL questions in the answer book provided.
2.
Writing on the examination answer book is NOT permitted during reading time.
3.
4.
5.
6.
(This question paper consists of 8 questions in 7 printed pages, including cover page)
(5 marks)
Question 2 (5 Marks)
What are derivative contracts? What is the value of derivative contracts to treasury managers of large corporate?
(5 marks)
ii) How many contracts are necessary to fully hedge the bank?
(10 Marks)
b) How many put option contracts should it purchase to hedge its exposure against rising interest rates? The
face value of the T-bonds is $100,000.
(10 Marks)
b) Explain how TI can use currency options to hedge its exchange risk. How many options contracts will TI
need to fully protect itself?
(5 Marks)