16MBAFM405 Financial Derivatives syllabus for MBA

Financial Derivatives - Introduction, economic benefits of derivatives - Types of financial derivatives - Features of derivatives market - Factors contributing to the growth of derivatives - functions of derivative markets - Exchange traded versus OTC derivatives - traders in derivatives markets - Derivatives market in India

Futures and forwards - differences-valuation of futures, valuation of long and short forward contract. Mechanics of buying & selling futures, Margins, Hedging using futures - specification of futures - Commodity futures, Index futures, interest rate futures - arbitrage opportunities.

Interest rate markets - Type of rates, Determining Zero rates, Forward rate agreements (FRA), Interest rate derivatives.

Financial Swaps - features and uses of swaps - Mechanics of interest rate swaps – valuation of interest rate swaps – currency swaps – valuation of currency swaps.

Options: Types of options, option pricing, factors affecting option pricing – call and put options on dividend and non-dividend paying stocks put-call parity - mechanics of options - stock options - options on stock index - options on futures – interest rate options. Concept of exotic option. Hedging & Trading strategies involving options, valuation of option: basic model, one step binomial model, Black and Scholes Model, option Greeks. Arbitrage profits in options.

Commodity derivatives: commodity futures market-exchanges for commodity futures in India, Forward Market Commissions and regulation-commodities traded – trading and settlements – physical delivery of commodities.

Credit risk - Bond prices and the probability of default, Historical default experience, reducing exposure to Credit risk, Credit default swaps, Total return swaps, Credit spread options, Collateralized debt obligation. Basics of Interest rate risk and risk management strategies.

Value at Risk (VAR) - Measure, Historical simulation, Model building approach, linear approach, Quadratic model, Monte Carlo simulation, stress testing and back testing

(Question Paper: 50% Theory and 50% Problems)

Practical Components:

• Students can visit a financial institution dealing in derivatives and study the products offered by them

• Students should individually select various futures or options and watch the behavior of these futures and options on a day to day for 15 days to see how futures and options might help mitigate the risks of investors.