Tribhuvan University
Faculty of Management
Office of the Dean
Bachelor of Business Management (BBM)
Course Description
: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.
Course Objective
:This course aims to provide students with a foundation in the study of derivatives a nd their applications 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 are used to achieve various hedging and speculating objectives. Course Description 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.
Course Contents:
Lecture hours show the approximate classroom time allocated to each unit.
Unit 1. Introduction
- Derivative markets and instruments
- Core concepts in financial and derivative markets
- Spot and 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
- Development of options markets
- Call and put options
- Payoff and profit diagrams of stock transactions and options transactions
- Over -the-counter options market
- Exchange -listed options trading
- Mechanisms of trading
- Option quotat ion
- Types of options
- Transaction costs in options trading.
Unit 3. Valuation of Option
- 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 model of option pricing with and without dividends
- The effect of change in variables on option value.
Unit 4. Option Strategies
- 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.
Unit 5. Structure of Future Market
- 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 tradi ng
- 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.
Unit 6. Pricing and Valuation of Forward and Future
- Cost of carry principle
- Pricing futures/forwards on investment assets, stock indices, foreign currencies, and commodities
- Carry arbitrage when futures/forwards are mispriced.
Unit 7. Swaps
- Concept and nature
- Features of swaps
- Introduction, pricing, and valuation of interest rate swaps, currency swaps, and equity swaps.
Unit 8. Financial Risk Management
- 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.
Suggested Readings:
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 Education Singapore 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. John Wiley & 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 P roducts, Applications and Risks. Pearson India.