Unit 1

Financial Derivatives: Definition – Features – Types – Basic Financial Derivatives – History of Derivative Markets – Use of Derivatives – Critiques of Derivatives – Myths about derivatives. Financial Derivatives Market in India: Evolution of derivatives in India – Recommendations of Dr. L C Gupta Committee – Benefits of Derivatives in India – Categories of Derivatives traded in India – Derivatives trading at NSE/BSE – Eligibility of stocks – emerging structure of Derivative Markets in India.

Unit 2

Forward Market: Pricing and Trading Mechanism – Concept and features of Forward Contracts –Classification of Forward Contracts – Forward Trading Mechanism.

Unit 3

Futures Market: Financial futures contracts – types – evolution of futures market in India – Operators/ Traders in futures market – functions of futures market – growth of futures market – Trading mechanism – the clearing house and operation of margin – Margin cashflows – closing a future position (settlement).
Futures pricing: Introduction – Reading futures prices – the basis – theories of futures prices –
futures prices and risk aversion – spreads – futures on commodities.
Forwards market as forerunner of Futures markets – Distinctions between Futures and Forward Markets.

Unit 4

Options: Concept – History – Terminology – Options vs. Futures – Valuation of Options –
Option Positions.
Option pricing models: Determinants of Option prices – The Black-Scholes Option Pricing Model –Binomial Option Pricing Model.
Trading with Options: Basic Principles – Strategies involving a single option and a stock –
Spreads – Vertical Spreads.

Unit 5

SWAP Markets: Concept and nature of SWAP – Evolution – features – major types of financial Swaps
Hedging Concepts: Multipurpose concept of hedging – The perfect hedging model – Concept of Basis Risk and Hedging – Hedging Effectiveness – Devising a hedging strategy Hedging objectives – Management of a hedge.
(Notes: Simple problems on basics are to be covered in the course)

Course Objective:
To equip the students with an in-depth knowledge of the engineering of financial derivatives.

Course Outcomes:

Textbooks:

1. S L Gupta – Financial Derivatives: Theory, Concepts and Problems – PHI
2. Bansal – Derivatives and Financial Innovations – McGraw Hill

Reference Books:

1. S.S.S. Kumar – Financial Derivatives – PHI
2. Parasuraman N – Fundamentals of Financial Derivatives – Wiley India
3. Bishnupriya Mishra – Financial Derivatives – Excel Books