Derivatives (Options, Swaps & Futures)

Department of Finance &

Investment
NUST Business School
National University of Sciences & Technology

BSAF 2K15
Course Details
Course Title: Derivatives (Options, Swaps & Futures)
Course Code: FIN-342 Credit Hours: 3
Program: BS (A&F) 2K15 Sections: A & B

Course Faculty
Dr. M. Suhail Rizwan
Office: Cubicles, NUST Business School, NUST H-12, Islamabad
Consultation Hours: 2:00 pm – 3:30 pm (Monday & Tuesday)
Tel: +92-51-90853159
Email: suhail.rizwan@nbs.nust.edu.pk

Course Description

In the last three decades, there have been some remarkable losses seen in the financial markets; for
example, the October 1987 market crash, 1998 LTCM crisis and the recent 2007-2008 subprime
mortgage crisis, to name but a few. Following the intense turmoil that started in financial markets
post August 2007, individuals skilled at pricing derivatives and at using these instruments for risk
management remain in high demand on Wall Street and elsewhere. Organizations have embraced
sound risk management and practices to avoid exposing themselves to unnecessary financial risks
on the one hand, and taking calculated risks on the other. Organizations have embraced derivatives
as a risk management and hedging vehicle to the extent that many corporations now feature
risk−management divisions

Course focus and Modules: With these in mind, this course is designed to equip students with the
essential frameworks and tools needed to understand and effectively manage financial risks. In this
course, students receive a thorough introduction to the valuation of, and to key hedging and risk
management strategies based on, key derivatives contracts: futures, forwards, swaps and options.

Course Objectives
This course provides a basic introduction to financial derivatives and risk management and covers a
range of topics in contemporary finance, specifically forwards, futures & options as securities for risk
management & speculation. It also examines exposures to equity, currency, interest rate &

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commodity risk. Students will learn about pricing derivatives using analytical & numerical
techniques and using financial derivative including credit derivatives in risk management. The course
will extensively focus on the theory and applications of risk management tools

The objective of this course is to

1. Explore the use of basic types of derivative instruments and hybrids in the context of financial
risk management by firms and financial institutions.
2. Offer a theoretical framework within which the properties of all derivatives can be
comprehensively analysed and valued.
3. To provide a solid foundation for advanced courses of the program such as fixed income
analysis and financial engineering.
4. Students are expected to develop competencies in pricing, hedging and trading strategies

Course Learning Outcomes (CLO)

This course aims to provide students with the ability to understand:
1. Understand the operation of derivatives markets (options, futures, forwards and swaps)
2. Be aware of the wide range of derivative products and how they can be used to manage risk.
3. The design of forwards, futures, swaps, and option contracts
4. Their theoretical and practical differences
5. Valuation of derivatives using software.
6. The payoff of a Eurodollar futures
7. Master the fundamental concepts in valuing derivative products (both analytical and
numerical).
8. How the instruments covered can be used to implement basic market risk management
strategies, appropriate for corporate applications
9. How to solve basic problems requiring the ability to price derivative instruments and hedge
market risk based on numerical data and current market conventions
10. Their developments, and the economic roles they play in the financial markets
11. The basic risk management and trading strategies using derivatives
12. The understanding of Ethical issues in the usage of derivatives.

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Program Learning Goals and Objectives
General Learning Goals & Objectives:
1. Provide an in-depth knowledge of principal methods and techniques of accounting and
financial management.
2. Instill a structured approach in students to effectively deal with complex business issues.
3. Prepare students for the role of accounting/ finance professionals who can add value to all
areas of organization.
4. Enhance interpersonal, team building, communication, and leadership skills.
5. Incorporate a sense of professional ethics and responsibility.
6. Provide hands on training in different soft wares in accounting and finance.
7. Enter into collaborative arrangements with various local and international accounting and
finance bodies.

Course Evaluation (Grade Breakup)

All students are expected to take part in class discussions. Course or topic-based
dialogues/discussions are encouraged. Lectures will be comprised of reading topics, assignments
listed below as well as add-on through current practical issues related to the topic in international
context. Students are encouraged to read the assigned readings before coming to attend the lecture.
We won't necessarily cover every chapter topic in class.

Assessment Criteria
Grading will be done as per NBS criteria. The breakup of the grade points is as follows:

Exam %age
Class Participation 5%
Quizzes (best of 3 X 5%) 15%
Group Project/ Assignments/Case Studies 20%
Mid-Term Exam 25%
Final Exam 35%
Total 100%
Mapping Program Objectives & Goals with Course Learning Outcomes

PROGRAM LEARNING GOALS COURSE EVALUATION

COURSE LEARNING OBJECTIVES
AND OBJECTIVES ITEM
Master the fundamental concepts
in valuing derivative products
Goal 1- Provide an in-depth (both analytical and numerical).
knowledge of principal methods How the instruments covered can
CP, and Exam
and techniques of accounting be used to implement basic
and financial management. market risk management
strategies, appropriate for
corporate applications.
How to solve basic problems
Goal 2 - Instill a structured requiring the ability to price
approach in students to derivative instruments and hedge Cases and exams (minor
effectively deal with complex market risk based on numerical
component)
business issues. data and current market
conventions.

Understand the operation of

derivatives markets (options,
Goal 3 - Prepare students for futures, forwards and swaps) Be
the role of accounting/ finance aware of the wide range of Cases and exams (minor
professionals who can add value derivative products and how they component)
to all areas of organization. can be used to manage risk.

Goal 5 - Incorporate a sense of

professional ethics and
responsibility.
Goal 6 - Provide hands on
training in different soft wares
in accounting and finance.
Goal 7 - Enter into collaborative
arrangements with various local
and international accounting
and finance bodies.
The understanding of Ethical CP, quizzes, assignments,
issues in the usage of derivatives. cases and exam
Valuation of derivatives using
softwares. Assignments, cases
Students work in groups of 4-5
persons each to prepare case
Cases
briefs and analyses. Projects and
case presentations.
Course Content (Weekly)
Weekly breakdown is given below

Session Outcomes
Week Lecture No. and Topic Reading (Students should be able
to…)
1 Orientation
LECTURE 1&2: Overview of Understand the derivatives
Derivatives and Risk
1 Derivatives and their usage for and their usage (CLO # 1)
Management.
Risk Management.
Understand Interest rates,
interest rate risk and its
relevance in derivative
Chapter 4-Interest
2 LECTURE 3 & 4: Interest Rates valuations.
Rates. Book 2
Solve numerical problems
and use software for the
purpose.
Understand the derivative
LECTURE 5 & 6: Derivative markets and forward and
Chapter 4-Forwards
3 markets and instruments
and Futures. Book 1 futures derivative
instruments
Chapter 13: Futures
LECTURE 7 & 8: Futures Hedging Use of Futures derivatives to
4 Hedging. Book 1. Case
manage risk.
Study.
Chapter 5: Options. Understand Options
5 LECTURE 9 & 10: Options
Book 1 derivatives and mechanisms
Chapter 5: Options. Able to find option value
6 LECTURE 11 & 12: Option
Book 1. Case study. using software
Understand different option
LECTURE 13 & 14: Option Chapter 15. Option
trading strategies for risk
7 Trading Strategies Trading Strategies.
Book 1.
management and spread
purposes
Understand different option
Chapter 15. Option
LECTURE 15 & 16: Option trading strategies for risk
8 Trading Strategies.
Trading Strategies
Book 1.
management and spread
purposes
9 MID-TERM EXAM WEEK
Chapter 7: Financial
10 LECTURE 17 & 18: Swaps Engineering and Understand basics of swaps
swaps, Book 1

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 Understand interest rate
LECTURE 19 & 20: Interest Rate Chapter 22: Interest swaps and their usage for risk
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Swaps rate swaps. Book 1 management and earning
purposes
Chapter 6: Currency Understand foreign exchange
LECTURE 21 & 22: Currency
12 Futures and Swaps. risk management using
Futures and Swaps
Book 3 futures and swaps.
Chapter 6: Currency Understand foreign exchange
LECTURE 23 & 24: Currency
13 Futures and Swaps. risk management using
futures and Swaps
Book 3 futures and swaps.
Understand foreign exchange
LECTURE 25 & 26: Currency Chapter 7: Currency
14 risk management using
Options Options. Book 3
options.
Understand foreign exchange
LECTURE 27 & 28: Currency Chapter 7: Currency
15 risk management using
Options Options. Book 3
options.
LECTURE 29 & 30: Project
16 Project presentations
presentations
17 Buffer Week.
18 FINAL EXAM WEEK

Required Course Material

Casebook:
Case studies from Harvard Business Cases will be provided during the course.
Textbook:
No specific textbook is required for this course. You may use any standard Derivative textbook to
review the assigned topic. Several Derivatives textbooks are listed below. The course schedule
refers to relevant chapter. Material indicated as “Optional” is not mandatory reading. You can
substitute this material with any textbook of your choice.
Reference Books:
1. An Introduction to Derivative Securities, Financial Markets, and Risk Management-Robert A.
Jarrow, Arkadev Chatterjea. Norton and Company, New York.
2. Options, Futures, and Other Derivatives. 8th Edition. John C. Hull. Pearson. 2012.
3. International Finance; an analytical approach. Imad A. Moosa, McGraw-Hill Australia, 2009.

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Additional Recommended readings
Students are encouraged to read financial publications such as the Wall Street Journal, Financial
Times, Business Recorder to stay abreast of developments related to this course

Course Policies
Project
Students are required to form groups of 4-5 each during the first week of the course. Each assigned
task (case study or project etc.) will be presented by one team and rebutted by another team.
However, both teams should be prepared for the presentation- one will be asked (at the discretion of
the instructor) to present while the other rebuts. Each team is required to submit written analysis of
the task at the beginning of the session. All the other teams are required to read the relevant material
and submit a two-page brief at the beginning of the class on the day of presentation. The text of the
brief should address the following: (1) what is primary problem(s) in the case; (2) what is your
interpretation of the exhibits, and (3) what is your recommendation to management. If you attach
any exhibit to the case brief, please cite in the text. The written should be well-organized, concise
with reasoned arguments covering the key areas of concern, and focus on financial analysis- not just
rewriting case facts. The written report must be typed and prepared in the format specified below:

I. Executive Summary (2 pages)

II. Introduction
III. Analysis
IV. Conclusions
V. Exhibits

Executive Summary: The first page summarizes the case facts and identifies the financial problem(s),
issues or areas of concern. The second page should present key findings and summary
recommendations. The introduction section explains the focus of analysis and highlights why the
issues are important to the company. Key information and data including the case questions can be
used to support the analysis and recommendations. All figures supporting the analysis must be
included in the exhibit section. The suggested case questions are designed for discussion purpose and
intend to guide you in the analysis. The written report will be due on the day of assigned case

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presentation (at the beginning of class). No late reports will be accepted. The case reports will be
evaluated both in terms of analysis and quality of the write up. The case presentations must be well
planned and professionally presented. All team members must be thoroughly prepared to present
the case analysis and answer any question on the case. Each student is expected to carefully read all
the assigned cases and come prepared to actively participate in vigorous and informed discussions.

Each group must work as a team in preparing the case write up/presentation. The groups are
expected to meet regularly outside of class to prepare for the assigned cases. To minimize the “free-
rider” problem, the instructor will provide a peer evaluation form to each student to evaluate the
contribution of his/her team members in preparing the case analysis.

The criteria for marking is as follows;

Project Component Details Marks

Report

Adequacy, comprehensiveness, writing and relevancy

Report writing 40%
of the report.

Report presentation Effectiveness, clarity, speaking fluency, and projection. 40%

Team coordination Team work, tam co-ordination, and synergy. 20%

Total 100%

Class Participation
Students are encouraged to share their point of view with the class regarding the relevant subject
matter and students are encouraged to take part in constructive, relevant and professional debates
in class. Disturbing the class just for the sake of speaking up in class will be dealt with seriously.

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Attendance:
▪ In the event of a missed session, it is the student’s responsibility to consult LMS/CMS and their
class mates for missed content.
▪ Class attendance will be taken in first 5 minutes of the class. Do not be late for class otherwise
you will be marked absent for the session(s).
▪ If you are away on official NUST duty1, it is the student’s responsibility to inform the instructor
on time with an official notice2. Consequently, the student will still be marked as present, but
as “On Duty”. AIESEC events and activities related duties don’t qualify for “On Duty” status
unless instructed by Dean/Principal NBS.
▪ It is the student’s responsibility to continuously monitor his/her attendance. Do Not ask the
instructor to change/modify the attendance, unless there has been an accidental oversight. In
such an event, the student should inform the instructor of the error (with proof) before the
month ends.

Assignments:
▪ Please submit all your take-home assignments in hard copy to the CR who will submit them
to me by 5:00pm.
▪ All soft copies of the take-home assignments should be submitted on LMS by 11:55 pm on the
designated day.
▪ Make sure you use the sample front page provided (at the end of this outline) as a cover to
any assignment conducted unless it’s an in-class assignment.
▪ Take note that late submissions will not be counted.
▪ There will be no make-up assignments of any kind.

Quizzes:
Students will take pop quizzes as well as announced quizzes (see Dates to Remember). There will
be no make-up quizzes under any circumstances.

1
Duties include representing NUST at any forum both at national and international level and being
assigned duties by NUST societies/authorities for NUST/NBS level events.
2
An application duly signed by the Principal/Dean of NBS

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Academic Dishonesty:
Students need to carefully consider NUST Business School’s policies regarding plagiarism. Group-
work is encouraged but any form of plagiarism is a crime and will not be tolerated. Strict action will
be taken against any student(s) found plagiarising any material and submitting it as his/her own.
You are responsible for knowing and enacting academic conduct that is in line with the University’s
statement entitled “Academic Dishonesty” available on NUST’s website:
http://www.nust.edu.pk/usr/showContents.aspx?mdl=1839
The statement highlights examples of unacceptable behavior which include, but are not limited to,
the following:
▪ Cheating: Intentionally using or attempting to use unauthorized materials, information, or
study aids in any academic exercise; copying from another student’s examination; submitting
work prepared in advance for an in-class examination; taking an examination for another
person or conspiring to do so.
▪ Plagiarism: Intentionally or knowingly representing the words or ideas of another as one’s
own in any academic exercise; failure to attribute direct quotation, paraphrase, or borrowed
facts or information.
It is expected that all work that is handed will be your own. Any ideas or content that come from
another source must be properly cited (including any content taken from the Internet, books, articles
and lectures). Make sure you understand the Plagiarism policy handed to you by the university
(Student Handbook) and you should bring it with you in the next class that you take with me3.
Moreover, TurnItIn will be used as the plagiarism software to evaluate all your submissions. Any
acts of plagiarism and cheating will be dealt strictly and in accordance with the policy in place by the
University.

3 Students who will do so will receive bonus CP points

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Dates to Remember

The dates/weeks provided in this section are a reasonable estimate of due dates for quizzes,
assignments and project related material submission. These may be subject to modification by the
instructor due to unforeseen circumstances/minor modifications in course. However, until informed
so, please consider these dates/weeks as final.

Date Item Due

Lecture 3 Announced Quiz No. 1

Lecture 5 Project Titles Finalized
Lecture 6 Assignment No. 1 (In-Class)
Lecture 7 Announced Quiz No. 2
Lecture 25 Assignment No. 2 Due
Lecture 23 Announced Quiz No. 3
Lecture 25 Announced Quiz No. 4
Lecture 27 Written Report Submission
Week 16 Group Presentations

Bear in mind that it is the responsibility of the student to continuously keep track of these
dates/weeks/lecture outline and any student not prepared for the class will be marked
negatively in CP as well as the relevant class activity.

Do’s and Don’ts of Class

DO
Come to class on time and having
completed the reading material.
Take notes during the lectures.
Ask questions that are relevant to the topic
being discussed and participate actively in
class discussions and activities.
Let the lecturer know in advance if you need
to miss a class.
DONT
Submit assignments, quizzes late. Such
assignments and quizzes will not be accepted.
Cause disturbance in class. If you have a
question, address it to the lecturer.
Walk in and out of class during the lecture as
you please. If you have an emergency, let the
lecturer know.
Come to class without your own copy of
reading material assigned for that week.
 Constantly check the deadlines that are
Ask the lecturer to reschedule deadlines.
due.
Constantly monitor the course outline and
Ask the lecturer to change attendance details.
have it with you at all times.
Research topics and news items for
constructive (and respectful) in-class Eat/Drink food in class (Except chocolate).
debates.
Do Not forget to write some form of
identification on each document that is due
Switch off/Put your phones on silent
for submission of any kind. It is not anyone’s
during class.
responsibility to keep track of the author of
such documents but the author himself/herself.

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Sample Front Page for Report/Assignments

NUST Business School

FIN-342 – Derivatives (Options, Swaps & Futures)

Topic of Report/Assignment

Submitted to;
Mr. M. Suhail Rizwan
Submitted by;
xxx
BSAF 2K14 A/B

Date: xx Month, 2017.