Financial Derivatives

Course ID
FC 502
Paper Type
Core Course
Lecture & Tutorial

Unique Paper Code: 61011502

To equip students with principles and techniques of financial derivatives, its trading and strategic application. It also discusses the Complex Derivatives like Greeks & Exotic Options, Financial Swaps etc.

Learning Outcomes:

At the end of the course, students should be able to:

  • Students will understand the need of financial derivatives.
  • It will enable the students to select right kind of derivatives amongst forward, futures, options, Greeks, swaps for risk hedging.
  • Understand the option pricing models.
  • Able to distinguish among hedging, speculation and arbitrage.

Course Contents

Unit I
Unit II
Unit III
Unit IV

Unit I (2 weeks)

Introduction: History of derivatives, origin of derivatives in India, the classification of derivatives, the important features of derivatives. Early delivery, extension & cancellation of forward contracts. Basis risk, why hedge. Currency futures and its hedging strategies. Derivatives trading in India.


Chapter 1 (Section 1.6)– [S.L Gupta]

Chapter 5 (Section 5.1-5.4)– [S.L Gupta]; P.G. Apte

Chapter 3 (Section 3.1-3.3) – [J.C Hull]

Chapter 5 (Section 5.10) – [J.C Hull]

Unit II (2 weeks)

Options and its type, Factors affecting option Prices, upper bounds, lower bounds, early exercise, put & call parity, put & call parity (dividend effect). Trading strategies involving options: Spreads, combinations, payoffs; binomial model: One Period, Two Period and multiple Period. Black- Scholes option model. Naked & covered position, options given by financial institutions, Stop loss strategy portfolio insurance


Chapter 10 (Section 10.1, 10.3) – [J.C Hull]

Chapter 11 (Section 11.1-11.4) – [J.C Hull]

Chapter 12, (Chapter 12.1-12.5) – [J.C Hull]

Chapter 13, (Chapter 13.1, 13.3-13.8) – [J.C Hull]

Chapter 15, (Chapter 15.1 – 15.9) – [J.C Hull]

Unit III (3 weeks)

The Greek Letters: A Stop Loss strategy; Delta Hedging, Delta of European Stock Options; Delta of a portfolio; Theta of a portfolio; Gamma: Making a portfolio Gamma Neutral.


Chapter 17 of J.C Hull

Unit IV (2 weeks)

Understanding of Interest rate swap, currency swaps & cross currency swaps. Understanding and types of Exotic Options. Credit Derivatives: Credit ratings, Default intensities, Recovery rates, estimating default probabilities from bond prices; Credit Default Swaps (CDS).


Chapter 7, 24 and 28 of J.C Hull

Additional Information

Text Books

John C. Hull. Options, Futures and Other Derivatives (latest ed.). Pearson Education.
Gupta, S.L, Financial Derivatives: Theory, Concepts and Problems (latest ed.), PHI Learning Publications.

Additional Readings

JurgenFranke, Wolfgang Hardle and Christian Hafner. Introduction to Statistics of Financial Markets.
R. Madhumathi, M. Ranganatham. Derivatives and risk management (1st ed.) Redhead, K. Financial Derivatives- An introduction to futures, forwards, options, swaps. Prentice Hall of India

Teaching Learning Process

Class room lecture, Case study discussion, Numerical Problem solving, Class presentation on the assigned topic by students individually or in group, Workshop, Tutorials, Role play

Assessment Methods

1. Internal evaluation of 25% marks
a. Attendance 5% marks
b. Two internal evaluations by the teacher with 10% marks each out of which one must be a class test and other may be another test or home assignment or presentation. Faculty may take more than two assignments and (or) tests but total will be only 20% marks.
2. End term University Exam of 75% marks


Forward contracts, Futures, Options, Financial Swaps, Greeks, Exotic Options

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