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In recent years, our derivatives market has gone through a tremendous evolution
that involves huge transactions in short period of time. To achieve the importance
of this financial derivatives market this course is meant to give knowledge,
understanding and exposure to students about derivatives concepts. This will
equip students with risk management tools on hedging using the derivatives
market instruments that are very useful to the students as they are specializing in
finance as a major. This is to ensure that students are equipped with understanding
of the concepts and able to analysis derivatives in order for them to compete with
UNIVERSITI SAINS MALAYSIA the outside world in term of managing risks. At the beginning of this course,
students will be introduced to the futures instruments and at a later part with a
School of Management more challenging, complex and innovative options instruments.


Semester II, Academic Year 2016/2017


COURSE OUTLINE 1. To give exposure on the derivatives market to the students

2. To give exposure on the derivatives instruments to students

AFW 368 Financial Derivatives
3. To expose students on the strategies used in derivatives trade

4. Giving the basic knowledge to students about the valuation technique of

Ahmad Zainuddin Bin Salleh derivatives instruments
Tel: 017-5859011 5. Giving the basic understanding on how derivatives instruments can be
used as a risks management tool in investment portfolio
Dr Eliza Binti Nor
Tel: 04-6532530

1. Able to understand the importance of the existence of the derivatives

market as part of the financial and capital market. Course Objective a
Learning Achievement b
Teaching and
Learning Technique
2. Able to understand the types of derivatives instruments such as futures 1 1 1 (80%)
and options including its advantages and disadvantages. 2(20%)
2 1, 2, 3 1(60%)
3. Able to identify and select the correct strategies with the right 2(20%)
instruments in different financial situation for example straddle, strangle, 3(20%)
condor and many others. 3 1, 2, 3, 4 1 (50%)
2 (20%)
4. Able to apply the knowledge of hedging methods in equity futures, 3 (20%)
commodity futures, interest rates futures, foreign exchange futures and 4 (10%)
many more. 4 1, 2, 3, 4, 5 1 (50%)
2 (20%)
5. Able to identify the appropriate hedging ratios and strategies for risks 3 (20%)
management in all types of investments. 4 (10%)
5 1, 2, 3, 4, 5 1 (50%)
2 (20%)
3 (20%)
4 (10%)


a b
Course Assessment Learning Achievement Teaching and
Learning Technique
1. Project paper 20%
Tutorial 1,2, 3, 4 1, 2, 3, 4
2. Mid-semester examination 20%
Project 1, 2, 3, 4 1, 2, 3, 4
3. Final semester examination 60%
Mid-semester 1, 2, 3 1, 2, 3, 4
Final Semester 1, 2, 3, 4, 5 1, 2, 3, 4
Teaching and Learning Technique: Final-Semester Examination 60%:
1. Lecturing Duration : 3 hours.
2. Tutorial Type of Questions: Objective & Structured
3. Learning of basic problems Coverage : All topics learnt.
4. Case research Level : Understanding, analytical thinking and application.
5. Project
6. Project Presentation
7. Computer Lab Attendance
8. Library research
9. Industrial Trainning Students need to attend tutorial the minimum of 70% of the full attendance in
order to sit for the final examination. Students can be barred from taking the final
examination if they are failing to do so. Attendance to the SIDC seminar is
Stages of Learning: compulsory as well (subject to availability).
1. Memory recall
2. Basic Understanding Optional:
3. Permanent Understanding
4. Analyse Students are advise/encourage to sit for the SIDC Futures & Options: Module 14
5. Application SIDC examination before the final exam to familiarize with the multi choice
6. Synthesis (mcq) type of questions. Exam fee: RM200 (Please refer to for
details). This is to test your understanding in the subject and course taken and a
value-added during job seeking after graduation.
Seminar (subject to availability):
Tutorial: Issues or questions are given at the end of each chapter. Students
need to voluntarily themselves to present the task given while others will ask A compulsory seminar conducted by Securities Commission on topic Futures &
questions regarding issues that they have learnt or dont understand. Students Options will be held on selected Saturday, time between 9am till 5pm (lunch will
involvement/participation in tutorial sessions and how they deliver the issues be provided plus goodie bag given if your are lucky) on week 11 th, 12th or 13th..
based on their understanding is a must. Attendance will be taken on both morning and evening sessions.

Project 20%: In groups of four, students need to choose a public listed CONTENTS OF COURSE
company and analysis the company exposures toward any financial risks and
suggest any appropriate hedging opportunity using financial derivatives tools Weeks Topic of Lectures Chapter
in managing the companys risks. Each group member needs to identify one
risk each and shows the calculation of the hedging strategy based on the 1 Derivatives: Introduction, Overview & Ethics 1,2
companys exposures. (Obiyathulla & Module 1 SIDC)
Malaysian Derivative Markets and Trading Refer:
Mid-semester examination 20%:,,
Duration : 2 hours, & all Malaysian
Type of Questions: Objectives & Structured Investment Banks website
Coverage : Derivatives market, Futures instruments and the hedging,
speculating, arbitraging strategies
Level : Understanding, analytical thinking and application
2 Fundamentals of the Futures Market (Module 1&2 SIDC) 3
The concept, mechanics and participants Calls & Puts
The clearing process Payoffs to Investing in Stocks Options
Principles of futures contract pricing Expectation and Option Position
Uses and applications
3 Stock Index Futures (Obiyathulla & Module 2 SIDC) 4 Option Moneyness
Stock Indexes FKLI and their futures contracts
Uses of stock index FKLI futures 8 Mid-Semester Examination
Hedging, arbitraging and speculating with stock 9 Option Contracts: Specification & Trading (Obiyatulla & 7
index FKLI futures Module 3 SIDC)
Trading Options Contracts
4 Commodity Futures (Obiyathulla & Module 2 SIDC) 3 Option Premiums & Underlying Asset Price
Crude Palm Oil Futures Contract FCPO American Style Options & Early Exercise
Pricing FCPO Contracts Intermediation and Margining
Hedging, arbitraging and speculating with Contract Specifications

10 Basic Option Strategies & Payoff (Obiyatulla) 8

5 Fundamentals of Interest Rate Futures (Obiyathulla & 5
Module 2 SIDC) Uncovered/Naked Positions

Interest rate futures Hedge Strategies-Portfolio Insurance

3-month KLIBOR futures contract Hedging a Short Stock Position

Hedging and arbitraging with KLIBOR Conversion Strategy

6 Single Stock Futures SSF & Bond Futures (Obiyatulla & 4

Module 2 SIDC) 11 Option Spread & Combinations Strategies (Obiyatulla) 8
Introduction SSF & Bond contracts Bull & Bear Spread
Pricing a SSF contract Straddle Strategies
Hedging, arbitraging & speculating with SSF Strangle Strategies
Covered Call Strategy
7 Introduction to Options (Obiyatulla & Module 3 SIDC) 6
Malaysian Futures and Options, Options-Module 3, Suruhanjaya Sekuriti, SIDC
12 Option Pricing (Obiyatulla) 9 Fifth Print 2008.
The Binomial Option Pricing Model ADDITIONAL REFERENCES

Probabilities & Volatility Strong, Robert A. Derivatives: An Introduction, Thomson-South Western, 2 nd. Ed.
Volatility & BOPM Option Value
Pricing Put Options with BOPM Hull, John C, Options, Fundamental of Options and Futures, 5th Ed. Prentice
Hall, 2005.

13 The Black-Scholes Option Pricing Model (Obiyatulla) 9 Hull, John C, Options, Futures, and Other Derivatives, 6th Ed Pearson 2006

The Underlying Logic of BSOPM Hull, John C, Risk Management and Financial Institutions, Pearson 2007
Underlying Assumptions
Kolb, Overdahl, Financial Derivatives: Pricing & Risk Management, Wiley 2010
Pricing Put Options
Rosalan Ali, Shafinar Ismail: Understanding Malaysia Derivatives, Principle &
Determinants of Options Prices Practice, Pearson Prentice Hall 2006

Derivatives: Valuation and Risk Management, David A. Dubofsky, Thomas W.

14 Replication, Synthetics and Arbitrage (Obiyatulla) 10 Miller, Jr., Oxford 2003
Replication and Synthetics
An Introduction to Derivatives and Risk Management, Chance & Brooks, South
Put-Call Parity and Arbitrage Western Cengage Learning, 9th Edition, 2013

Jacinta Chan: Everything Technical Analysis, How to Trade Like a Professional.

15 Final Semester Examination Pearson Prentice Hall, 1st Edition 2006.


Obiyathulla Ismath Bacha, Financial Derivatives: Markets and Applications in

Malaysia, 4th Ed., Mc Graw Hill 2017

Malaysian Futures and Options, Regulations-Module 1, Suruhanjaya Sekuriti,

SIDC Fourth Print 2007.

Malaysian Futures and Options, Futures-Module 2, Suruhanjaya Sekuriti, SIDC

Fifth Print 2007.