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OPTIONS AND FUTURE
Objectives: To provide the students with a first exposure to the area of Derivatives and Risk
management methods, equipping them with the basic concepts, tools and techniques of evaluation of
Derivative Products.
Level of Knowledge: This course should enable the students understand the mechanisms of the
Derivative Products markets, Basic level Computations for evaluating the Derivative Products,
Understand the importance of the difference between Hedging and Speculation, relative benefits and
demerits of different derivative products as tools of Risk Management.
CONTENT:
UNIT-I
1. Introduction (3 Hours)
(a) Basic introduction about Options and Futures Contracts, (1 Hour)
(b) Types of operators in the markets, (1 Hour)
(c) Difference between Hedging and Speculation. (1 Hour)
2. Mechanics of Futures Markets (4.5 Hours)
(a) Basics of Futures Markets and contracts (1.0 Hour)
(b) Difference from Forward Contracts
(c) Price Convergence, Settlement procedures
(d) Margin regulations, Reading Newspaper Quotes (1.0 Hour)
(e) Delivery and Squaring off
(f) Types of Traders and Orders
(g) Hedging Strategies using Futures (1.0 Hour)
(h) Basis, Basis Risk
(i) Stock Index Futures (1.0 Hour)
(j) Roll Forward of a Hedged position (0.5 Hour)
UNIT-II
3. Interest Rates and Interest Rate Futures (6 Hours)
(a) Different Types of Rates and their Computations
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(1.0 Hour)
(b) Forward Rate Agreements,
(c) CAPs, Floors, (1.0 Hour)
(d) Collars, Duration,
(e) Convexity,
(1.0 Hour)
(f) Term Structure,
(g) Interest Rate/Bond Markets, (1.0 Hour)
(h) Day count conventions, (1.0 Hour)
(i) Hedging Strategies using Interest rate Derivatives. (1.0 Hour)
4. Computing Forward and Futures Prices (6 Hours)
(a) Concepts of Income and Yield on an instrument, (1.0 Hour)
(b) Forward and Futures contracts on Stocks, (1.0 Hour)
(c) Currencies, (1.0 Hour)
(d) Commodities, (1.0 Hour)
(e) Cost of Carry, (1.0 Hour)
(f) Comparing Forward and Futures prices,
(1.0 Hour)
(g) Valuation of Forward & Futures Contracts
QUIZ: It covers from Unit no 1 & 2 of the syllabus.
UNIT-III
5. SWAPS (6 Hours)
(a) Basics of Swaps, (1.0 Hour)
(b) Mechanism of Swap deals, (1.0 Hour)
(c) Types of Swap contracts, (1.0 Hour)
(d) Determining LIBOR/Swap zero rates, (1.0 Hour)
(e) Valuation of Currency Swaps and Interest Rate Swaps, (1.0 Hour)
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(f) Exotic Swaps, (1.0 Hour)
6. Options Markets & Strategies (9 Hours)
(a) Types of Options, (1.0 Hour)
(b) Specifications, (1.0 Hour)
(c) Trading, (1.0 Hour)
(d) Margins, (1.0 Hour)
(e) Warrants, (1.0 Hour)
(f) ESOPs, (1.0 Hour)
(g) Optionally Convertible Bonds, (1.0 Hour)
(h) OTC Option Contracts, (1.0 Hour)
(i) Various Option Trading Strategies,
(j) Put-Call Parity,
(k) Effect of early exercise in case of American Options. (1.0 Hour)
CLASS TEST: It covers from Unit no 1 to 3 of the syllabus.
UNIT-IV
7. Option Valuations (9 Hours)
(a) Binomial Valuation – 3 methods, (1.5 Hours)
(b) Black Scholes Merton Model, (1.5 Hours)
(c) Volatility, Implied Volatilities, (1.5 Hours)
(d) Effect of Dividends on Option Valuation, (1.5 Hours)
(e) Using Normal Distribution Tables, (1.5 Hours)
(f) Using Black-Sholes-Merton model in valuation of ESOPs and Warrants (1.5 Hours)
8. Greek Letters (6 Hours)
(a) Delta, Delta Hedging, (1.0 Hour)
(b) Dynamic and Static Hedging, (1.0 Hour)
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(c) Covered and open positions, (1.0 Hour)
(d) Stop-loss strategy, (1.0 Hour)
(e) Theta, Gamma, (1.0 Hour)
(f) Vega and Rho, (1.0 Hour)
(g) Gamma Hedging.
CASE STUDY PRESENTATION / QUIZ: It covers from Unit no 1 to 4 of the syllabus.
UNIT-V
9. Volatility Smiles (3 Hours)
(a) Volatility Smiles, (1.0 Hour)
(b) Surfaces, (1.0 Hour)
(c) V.S. in Currency options and Equity Options. (1.0 Hour)
10. Exotic Options (3 Hours)
(a) Various types of exotic Options and their features.
END-TERM EXAMINATIONS: It covers from Unit no 1 to 5 of the syllabus.
Total (55.5 Hours)
Text Book:
1. Options, Futures and Other derivatives – By John Hull and Sankarshan Basu – Latest
Edition, Published by Pearson Education.
Reference Book
1. Student Solutions Manual for Options, Futures, and Other Derivatives 7th
ed by John C Hull
Pub.by Pearson Education.
2. Options & Future : An Indian Perspective by Patwari & Bhargava Pub. by Jaico
3. Fundamentals of Future and Options Markets by John C Hull Pub. by Pearson Education.
4. Derivative Markets by Gopalkrishnan & Jagannaraya Pub. by HPH
5. Investment Management by Maheshwari Pub. by PHI
6. Security Analysis & Portfolio Management by Fischer –Pub. by Pearson Education
