Financial Derivatives

Derivative markets and instruments; Core concepts in financial and derivative markets; Spotand derivative markets; Role of the derivative market; Criticism of derivative markets;Misuse of derivatives; Derivatives and ethics; and Career in derivative markets.

Development of options markets; Call and put options; Payoff and profit diagrams of stock transactions and options transactions; Over-the-counter options market; Exchange-list edoptions trading; Mechanisms of trading; Option quotation; Types of options; Transaction costs in options trading

Principles of call option and put option pricing; One-period binomial model: valuation of call, valuation of put, hedge portfolio, arbitrage; Two-period Binomial model: valuation of call and put, American options, and dividend adjustment; The Black-Scholes-Merton modelof option pricing with and without dividends; The effect of change in variables on option value.

Call and stock: the covered call; Put and stocks: the protective put; Option combination: straddle, strangle, strip, and strap; Spread strategies: bull spread, bear spread, and butterfly spread; Synthetic instruments

Development of forward and future markets; Over-the-counter forward market; Organized future trading; Future traders; Mechanics of futures trading; Types of future contract; Transaction costs in forward and futures trading; and Regulation of futures and forward markets; Development of derivative market in Nepal; Regulation of derivative markets in Nepal; Current issues in derivative markets of Nepal.

Cost of carry principle; Pricing futures/forwards on investment assets, stock indices, foreign currencies, and commodities; Carry arbitrage when futures/forwards are mispriced.

Concept and nature; Features of swaps; Introduction, pricing, and valuation of interest rates waps, currency swaps, and equity swaps.

Rationale for risk management; Hedging of equity risk and currency risk using options;Managing risk using forward and futures; Basis risk and imperfect hedge; Managing interestrate risk, currency risk, and portfolio risk by using swaps.