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Indian Institute of Management Kashipur, Kashipur

Financial Derivatives and Risk Management


Term V, 2014
Course Instructor: Anshul Jain
Objectives:
This course is designed to provide a solid foundation in the principles of financial risk
management. It attempts to strike a balance between institutional details, theoretical
foundations, and practical applications. This course presents and analyzes financial risks such
as market risks, credit risks, and operational risks; and management of above risks using
financial derivatives products.
These risk management instruments have become extremely popular investment tools over
the past 30 years, as they allow one to tailor the amount and kind of risk one takes, be it risk
associated with changes in interest rates, exchange rates, stock prices, commodity prices,
inflation, etc. They are used by institutions as well as investors, sometimes to hedge (reduce)
unwanted risks, sometimes to take on additional risk motivated by views regarding future
market movements.
Emphasis in this course will be on identification of the sources of financial risks;
measurement of risks and management of risks.
Text Book:
John C. Hull and Sankarshan Basu, Options, Futures, and Other Derivatives, 8th edition,
Pearson (hereafter OFOD)
Course Requirements:
The students will be assigned readings from the textbook and course material pack; and they
will be expected to come to class prepared and ready to take part in class discussions.
Attendance is mandatory in this class.
Grading:
Your total score in the course will be determined by the following weights:
Assignments 15%
Surprise Quizzes 15% (N best out of N+1)
Class Work 10%
Mid Term 30%
End Term 30%

Assignment:
There will be a group assignment. The class would be paired into groups of either THREE or
FOUR which will depend upon the work effort involved in the group assignment. Each group
will have one assignment during the course period which will take the form of a 25 minute
presentation based on an assigned issue/problem. Each group should also circulate a typed
text to the class one day prior to their presentation. The assignment will be graded on the
intellectual coherence and overall quality of the typed text plus the quality of the presentation
which will also include aspects such as presentational innovation and time management.
Group presentations will take place only after getting go ahead signal from the course
facilitator.
Other Information:
Recommended to carry calculator and course material to all the sessions. The students opting
for this course should have sound knowledge in basic statistics and mathematics. More so
they should be interested in dealing with numbers and equations. No plagiarism in
assignments, projects or exams will be tolerated and will be dealt with strictly. No request for
postponement of deadlines. Students whose preparation for the session is deemed
unsatisfactory will be asked to leave the class and no attendance will be given for the same.
Course Content:
Session 1-2: Risk and Risk Management Theory
Discussion a. Why is financial risk management important?
b. Why do firms hedge the financial risks?
c. Risk management in banks and other financial institutions
Case
Risk Management at Apache
Readings
Why manage risk?, HBS, 9-294-107, 2001
Owning the right risk: Kevin Buehler, Andrew Freeman, and Ron Hulme,
Harvard Business Review, September 2008.
The Six Mistakes Executives Make in Risk Management, N. N. Taleb, D. J.
Goldstein, and M. W. Spitznagel , Harvard Business Review, October 2009
Session 3-6: Forwards and Futures
Discussion a. Introduction to financial forwards and futures
b. Pricing and valuation of forwards and futures
c. Hedging and basis risk
d. Commodity futures
Case
Metallgesellschafts Hedging Debacle
Lufthansa
Readings
Chapters 2, 3, & 5 of OFOD
Financial futures: Scott P Mason, Harvard Business School , December
1999.
Session 7-12: Options
Discussion a. Introducing Options: Call and Put
b. Options arbitrage relationships
c. Option pricing models: BOPM & BSM
d. Options prices and valuations of options
e. Options Greeks and delta hedging
Cases
Sally Jameson: Valuing Stock Options in a Compensation Package
Pine Street Capital
Whatever Happened at Barings? Part I and Part II

Readings

Chapters 8, 9, 10, 11, 13 & 17 of OFOD


Equity Options, HBSP, 9-208-118
Session 13-14: Swaps
Discussion a. Introduction to Swaps
b. Types of Swaps : IRS and Currency Swaps
c. Pricing and valuation of swaps
Cases
The B.F. Goodrich-Rabobank interest rate swap
Rothmans Inc The Curious Case of the Interest Rate Swap
Readings
Chapter 7 of OFOD
Interest rate swaps, by Westpac Banking Corporation
Note on Foreign Currency Swap, Harvard Business School, 9-292 -043.
Session 15-16: Credit Derivatives
Discussion a. Credit risks and credit ratings
b. Credit risk mitigations and credit derivatives
c. Types of credit derivatives
d. Credit derivatives in India
Cases
Introduction to Credit Default Swap
First American Bank: Credit Default Swaps
Readings
Chapters 22 & 23 of OFOD
A Note on Credit Derivatives in India, by Dr. P. C. Biswal.
The credit derivatives market: its development and possible implications for
financial stability, by David Rule, Financial Stability Review, June 2001,
Bank of England
Session 17-18: Interest Rate Derivatives
Discussion a. Interest rate futures
b. Hedging strategies using interest rate futures
c. Interest rate futures in India
Reading
Chapter 6 of OFOD
Interest Rate Futures, National Stock Exchange, India
Session 19-20: Project Presentations