Options, Futures and other derivatives

Objectives: To provide an understanding of the need for derivatives, concepts of various derivative instruments available in the market, mechanics of trading, their pricing and valuation, risk management and trading strategies that can be adopted by various types of investors. 1. Introduction Futures vs Forward contracts Options contracts Types of traders Hedgers Arbitrageurs Speculators Mechanics of Futures and Forward Markets Trading futures contract Closing out of futures contracts Specifications of futures contracts Convergence of futures and spot prices Operations of Margins Delivery and settlement Determination of Forward and Futures prices Investment assets vs consumption asset Measuring interest rates Forward price of an investment asset Known income/known yield Valuing forward contracts Stock index futures Futures contracts on currencies Futures contracts on commodities Cost of carry Hedging strategies using Futures Hedge ratio Basis risk Stock index futures 5. Swaps Interest rate swaps Comparative advantage argument Currency swaps Options market Types of Options Option positions Underlying assets Specifications of stock options Trading Margins Properties of Stock Options Factors affecting option prices Put-call parity Early exercise of Calls and Puts Effect of dividend Trading strategies involving options Single options and stocks Spread Combinations Valuing stock options Black Scholes Model Assumptions Implied volatility

6.

2.

7.

3.

8.

9.

4.

10. The Greeks Letters Delta, Theta, Gamma, Vega, Rho

References: Evaluation: Quiz (3x10) Mid term test Final exam

Options, Futures and Other Derivatives by John C Hull

30 30 40