Financial Derivatives
bbasemester 8
Subject Code: BNK 202
Course Title: Financial Derivatives
Course No: BNK 202
Nature of Course: Theory & Practical
Full Marks: 100
Pass Marks: 50
Credit Hours: 3
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.
Chance, D. M. & Brooks, R. (n.d). An Introduction to Derivatives and Risk Management. Cengage
Learning India Pvt. Ltd.
Hull, J. C., & Basu, S. (n.d.). Options, Futures, and Other Derivatives. Pearson EducationSingapore Pvt. Ltd.
Johnson, R. S. (n.d.). Derivative Market and Analysis. John Wiley & Sons. Kolb, R. W. & Verdahl, J. A. (n.d.). Financial Derivatives: Pricing and Risk Management. JohnWiley & Sons.
Parasuraman, N. R. (n.d.). Fundamentals of Financial Derivatives. Wiley India. Taylor, F. (n.d.). Mastering Derivatives Markets: A Step-by-Step Guide to the Products,
Applications and Risks. Pearson India.