Financial Derivatives - Introduction, economic benefits of derivatives - Types of financialderivatives - Features of derivatives market - Factors contributing to the growth ofderivatives - 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 forwardcontract. Mechanics of buying & selling futures, Margins, Hedging using futures -specification of futures - Commodity futures, Index futures, interest rate futures - arbitrageopportunities.
Financial Swaps - features and uses of swaps - Mechanics of interest rate swaps – valuationof interest rate swaps – currency swaps – valuation of currency swaps
Options: Types of options, option pricing, factors affecting option pricing – call and putoptions 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 ofexotic option. Hedging & Trading strategies involving options, valuation of option: basicmodel, one step binomial model, Black and Scholes Model, option Greeks. Arbitrage profitsin options.
Commodity derivatives: commodity futures market-exchanges for commodity futures inIndia, Forward Market Commissions and regulation-commodities traded – trading andsettlements – physical delivery of commodities
Interest rate markets - Type of rates, Zero rates, Bond pricing, Determining Zero rates,Forward rules, Forward rate agreements (FRA), Treasury bond & Treasury note futures,Interest rate derivatives.
Credit risk - Bond prices and the probability of default, Historical default experience,reducing exposure to Credit risk, Credit default swaps, Total return swaps, Credit spreadoptions, Collateralized debt obligation.Value at Risk (VAR) - Measure, Historical simulation, Model building approach, linearapproach, Quadratic model, Monte Carlo simulation, stress testing and back testingPractical Components:• Students can visit a financial institution dealing in commodity derivatives and studythe products offered by him.• Students should individually select various futures or options and watch thebehaviour of these futures and options on a day to day for 15 days to see how futuresand options might help mitigate the risks of investors.