DERIVATIVES CORE MODULE

CURRICULUM
1. Introduction to Derivatives
 Derivatives defined, Products, participants and functions, Types of derivatives,
Development of exchange-traded derivatives, Global derivatives markets, Exchange-traded
vs. OTC derivatives markets, Derivatives market in India.

2. Market Index
 Understanding the index number, Economic significance of index movements, Index
construction, Types of indexes, Desirable attributes of an index, The S& P CNX Nifty,
Applications of index

3. Introduction to futures and options

 Forward contracts, limitations of forward markets, Introduction to futures, Distinction
between futres and forwards contracts, Futures Terminology, Introduction to options, Option
terminology, Futures and Options, Index derivatives, Payoff for derivatives contracts, Payoff
for futures, Options payoffs.

4. Pricing Futures
 The cost of carry model, Pricing equity index futures, Pricing stock futures.

5. Using index futures

 Hedging : Long security, short Nifty futures, Hedging : Short security, long Nifty futures,
Hedging : Have portfolio, short Nifty futures, Hedging : Have funds, buy Nifty futures,
Speculation : Bullish index, long Nifty futures, Speculation : Bearish index, short Nifty
futures, Arbitrage : Have funds, lend them to the market, Arbitrage : Have securities, lend
them to the market
 F&O market watch: Spot the mispricing
 F&O market watch : Spread Trading

6. Using stock futures

 Diffrence betweeen trading securities and trading futures on securities, Hedging : Long
Security, sell futures, Speculation : Bullish security, buy futures, Speculation : Bearish
security, sell futures, Arbitrage : Overpriced futures – buy spot, sell futures, Arbitrage :
Underpriced futures, buy spot, sell futures.

7. Pricing Options
 Introduction to the Black-Scholes formulae, The Black-Scholes Option pricing formulate.

8. Using index options

 Hedging : Have portfolio, buy puts, Speculation : Bullish index, buy Nifty calls or sell
Nifty puts, Speculation : Bearish index, sell Nifty calls or buy Nifty puts, Speculation :
Anticipate volatality – Buy a call and a put, Speculation : Bull spreads – Bull spreads – Buy a
call an sell another, Speculation : Bear spreads – sell a call and buy another, Arbitrage : Put
call parity violations, Arbitrage : Beyond option price bounds.

9. Using stock options

 Uses of stock options, Combination positions using stock futures and stock options Early
exercise of Americans options, Implied volatality.

10 Trading
 Futures and Options trading system, the trader workstation, Futures and Options market
instruments.

11 Clearing and settlment

 Clearing entities, Clearing banks, Clearing mechanism, Settlement mechanism, Risk
management.

12 Regulatory framework.
 Securities Contracts (Regulation ) Act, 1956
 Securities and Exchange Board of India Act, 1992
 SEBI (Brokers and Sub-Brokers) Regulations, 1992
 Regulations for derivatives trading
 Regulation for clearing and settlement
 Regulations for risk management
 Accounting of futures and options
 Taxation issues : A discussion