This course is designed to introduce students to the theoretical and practical aspects of financial futures, options, and other derivatives. This course introduces derivatives, the structure of options markets, the valuation of an option, the strategy of basic options, the structure of future markets, the valuation of forward and futures prices, swaps, and financial risk management.

This course aims to provide students with a foundation in the study of derivatives and theirapplications to risk management. More specifically, the course enables the students to understand the fundamental nature of derivatives, value options, forwards, and futures, and shows how they areused to achieve various hedging and speculating objectives.

Unit 1: Introduction (5 LHs) 
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.

Unit 2: Structure of Options Markets (7 LHs)
Development of options markets; Call and put options; Payoff and profit diagrams of stocktransactions and options transactions; Over-the-counter options market; Exchange-listedoptions trading; Mechanisms of trading; Option quotation; Types of options; Transactioncosts in options trading.

Unit 3: Valuation of Option (8 LHs) 
Principles of call option and put option pricing; One-period binomial model: valuation ofcall, valuation of put, hedge portfolio, arbitrage; Two-period Binomial model: valuation ofcall and put, American options, and dividend adjustment; The Black-Scholes-Merton model of option pricing with and without dividends; The effect of change in variables on optionvalue.

Unit 4: Option Strategies (8 LHs) 
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 butterflyspread; Synthetic instruments.

Unit 5: Structure of Future Market (5 LHs) 
Development of forward and future markets; Over-the-counter forward market; Organizedfuture trading; Future traders; Mechanics of futures trading; Types of future contract;  Transaction costs in forward and futures trading; and Regulation of futures and forwardmarkets; Development of derivative market in Nepal; Regulation of derivative markets in Nepal; Current issues in derivative markets of Nepal.

Unit 6: Pricing and Valuation of Forward and Future (5 LHs) 
Cost of carry principle; Pricing futures/forwards on investment assets, stock indices, foreigncurrencies, and commodities; Carry arbitrage when futures/forwards are mispriced.

Unit 7: Swaps (5 LHs) 
Concept and nature; Features of swaps; Introduction, pricing, and valuation of interest rate swaps, currency swaps, and equity swaps.

Unit 8: Financial Risk Management (5 LHs)
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 interest
rate risk, currency risk, and portfolio risk by using swaps.