Module I 1. Financial derivatives an introduction 1.1 Derivative markets 1.1.1 Past and present 1.1.2 Difference between exchange traded and OTC derivatives 1.2 Derivative instruments 1.2.1 Concept and definition 1.2.2 Purpose and criticism 1.2.3 Basics about forwards, futures, options and swaps 1.3 Hedgers, arbitrageurs and speculators 2. Forward market and products 2.1 Structure of Forward Market 2.2 Concept, characteristics and definition 2.3 Types of forward contracts 2.3.1 Equity forward 2.3.2 Currency forward 2.3.3 Bond and interest rate forward 2.3.4 Forward rate agreement 2.4 Valuation of forward 2.5 Generic valuation principles 2.6. Practical Concepts in Forward Market on Currencies 2.6.1 What is forward premium in USD/INR 2.6.2 History of forward premiums in India 2.6.3 What moves forward premium in India 2.6.4 Impact of forward premium on exchange rates 2.6.5 Interlinkage of forward premium with call money money market and liquidity situation in country 2.6.6 Do forward premiu m in USDINR indicate outlook on Interest Rate of country? 2.6.7 Trading in forward premium 2.6.8 Optimising Hedging decision based outlook on forward premium 2.6.9 Future outlook of forward premium with impending US Rate hike and lower inflation and Interest Rate in India 2.6.10 Does forward premium always reflect interest rate differentials? If not why? 2.6.11 Difference between forward premiu m in OTC and Exchange Traded futures and Arbitrage in USDINR
2.7. Practical Concepts in Forward Rate Agreement (FRA) 2.7.1 Liquidity in FRA market globally 2.7.2 FRA contracts permitted by RBI 2.7.3 Do Corporates in India and Globally use FRA s to hedge and why? 2.7.4 Quoting convention of FRA s 2.7.5 Bloomberg / Reuters Screenshot of FRA Markets and their interpretation 3. Future Market and products 3.1 Structure and role of global future market including leading future Exchanges 3.2 Concept, characteristics and definition 3.3 Types of future contracts 3.3.1 Stock future 3.3.2 Index future 3.3.3 Currency future 3.3.4 Interest rate future 3.3.5 Commodity future 3.4 Valuation of future 3.4.1 Generic valuation principles-cost of carry model 3.4.2 Valuation of individual future product 3.4.3 Trading mechanism and concept of margins (IM, MTM, MM) 3.5 Basis risk 3.5 Daily settlement price and Final settlement price 3.6 Practical Concepts in Futures Market 3.6.1 How to detect probable trends in Futures Market using basis differential 3.6.2 Open Interest and volume data of futures market 3.6.3 How to detect probable trends using change in Open Interest and volume in Futures market 3.6.5 How Index futures have evolved in India : NIFTY and BANK NIFTY 3.6.6 Index Funds and management of Index by Global Hedge Funds 3.6.7 Variety of Index in Indian Equity market and how to judge direction of single stock based on movement in sectroal index. 3.6.8 Bloomberg / Thomson Reuters chart showing Index movements 3.6.9 Practical concept of Contango and Backwardation in Commodities Market and why they arise. 3.6.10 Bloomberg / Thomson Reuters chart and explanation of
Contango / Backwardation 3.7. Applications & Risk Management of Forwards & Features Regulatory Aspects & Reporting. Module II 4.Option market and products 4.1 Structure and Role of Global Option Market including OTC and leading Option Exchanges 4.2 Concept, characteristics and definition 4.3 Option terminologies 4.3.1 Call option 4.3.2 Put option 4.3.3 American and European option 4.3.4 Option writer and buyer 4.3.5 Option premium including intrinsic value and time value 4.3.6 Strike price 4.3.7 ITM, ATM and OTM 4.3.8 Option payoff 4.4 Trading mechanism and concept of margins 4.5 Types of options 4.5.1 Stock option 4.5.2 Index option 4.5.3 Currency option 4.5.4 Commodity option 4.5.5 Options on futures 4.5.6 Interest rate options 4.6 Put -Call Parity 4.7 Valuations of options 4.7.1 Factors affecting option valuation 4.7.2 Binomial model (portfolio replicating and risk neutral approach) 4.7.3 BSOPM 4.8 Upper and lower limit of option prices 4.9 Exercising an option vs closing out 4.10 Option strategies (spreads, straddles and strangles) 4.11 Practical Concepts and Example of Options Market 4.11.1 Strategies adopted by Indian / Global Corporates to hedge exposures through Options and best practices. 4.11.2 Practical Examples of
4.11.2.1 Range forward, 4.11.2.2 Seagulls, 4.11.2.3 Ratio forward, 4.11.2.4 Forward extra, 4.11.2.5 participating forward, 4.11.2.6 Caps & Floors4.11.2.7 Spread Trades Calendar spreads and strike spreads 4.11.3 Understanding of important components of Option pricing 4.11.3.1 Delta : 4.11.3.1.1 What is delta? 4.11.3.1.2 Why option traders prefer to be delta neutral at inception? 4.11.3.1.3 Why delta changes over the life of Options? 4.11.3.1.4 What does delta trading imply when you are long an option and when are short the option? 4.11.3.2 Gamma: 4.11.3.2.1 What is gamma? 4.11.3.2.2 How does Gamma impact delta of an option? 4.11.3.2.3 Relationship of Gamma with strike, time to export 4.11.3.2.4 Which Gamma position does option trader hate to have? 4.11.3.2.5 Impact of event risk on gamma? 4.11.3.3 Theta: 4.11.3.3.1 What is theta 4.11.3.3.2 What is Theta bleed? 4.11.3.3.3 How does option trader avoid Theta bleed even if he is long an option? 4.11.3.3.4 Impact of Theta bleed on your profit / loss? 4.11.3.4 Vega: 4.11.3.4.1 What is vega and Rho? 4.11.3.4.2 What is long Vega and short Vega position? 4.11.3.4.3 How do option trader decide to be long Vega or short Vega? 4.11.3.4.4 Relationship of Vega and time to matu rity of option? 4.11.3.5 What quoted and Traded in option market. 4.11.3.6. What is risk reversal and fly and how are they quoted in option market
4.11.3.7 How to derive volatility for any strike using at the money vol, fly and risk reversal. 4.11.3.8 How to identify future direction of market using fly and risk reversal. 4.11.3.9 How did fly and risk reversal behave during US sub prime crisis and how have they evolved. 4.11.3.10Brief understanding of running of Option book by professional traders. 4.11.3.11 How options provide superior pay-off then options 4.11.3.12 Directional strategies using Options 4.11.3.13 Non directional strategies using Options Comment. 4.11.3.14 How one make money throu gh option even if the underlying is not moving much 4.11.3.15 Using Options to hedge ECB, Buyers credit, current exposure and probable exposu re 5. Exotic option 5.1 Types of exotic option 5.1.1 Bermuda option 5.1.2 Forward start option 5.1.3 Compound option 5.1.4 Barrier option 5.1.5 Chooser option 5.1.6 Basket option 5.1.7 Binary option 5.1.8 Look back option 5.1.9 Asian option 5.2 Hedging and pricing of exotic option 5.3 Practical Concepts and examples of Exotic Options 5.3.1 Frequently executed Exotic Options by Hedge Funds 5.3.2 Frequently executed Exotic Option by Corporates 5.3.3. Use of compound Options and Forward start options in Mergers and Acquisitions 5.3.4 Use of Basked Options by Hedge Funds and how they are superior to vanilla Options 5.3.5 Why institutions do Binary / Digitial Options 5.3.6 Combinations of Vanilla and Binary Options which are frequently executed by global corporate and funds 5.3.7 Knockin Knockout Options 5.3.8 Knockin Options European and American 5.3.9 Knockout Options European and American
5.3.10 Double knockin Options 5.3.11 Double Knockou t Options 5.4 Third Generation Options 5.4.1 Target Redemption Forward ( TARF) 5.4.1.1 Vanilla TARF 5.4.1.2 Pivot TARF 5.4.1.3 European knockin TARF 5.4.1.4 Digital TARF 5.5 Exotic Structures 5.5.1 Snowball Structure 5.5.2 Wedding Cake structure 5.5.3 Reverse Knockout Forwards 5.5.4 Applications & Risk Management of Currency Options Regulatory Aspects & Reporting 5.5.5 Option pricing bionominal, trinominal trees etc 5.5.6 Option strategies black-sch oles and option based hedging strategies. Module III 6. Swaps 6.1 Concept, Characteristics, Definition and Pricing 6.2 Types of swaps 6.2.1 Interest rate swap (IRS) 6.2.2 Currency swap 6.2.3 Equity swap 6.2.4 Other types of swaps 6.3 Valuation of swap-overnight swap & commodity swap 6.4 Swaption 6.5 Credit risk and swap 6.6 Stragegies and Applications of Currency Swaps 6.7 Practical Concepts and examples of Swaps 6.7.1 Interest Rate and Currency Swaps executed in India by Interbank and Corporates : 6.7.1.1 OIS Swap 6.7.1.2 MIFOR Swap 6.7.1.3 INBMK Swap 6.7.1.4 Full Currency Swaps 6.7.1.5 Coupon only swap 6.7.1.6 Hedging of Buyers Credit / ECB in India
6.7.2 RBI regulations governing FX and Interest Rate swap in India 6.7.3 Reciprocal Swaps between Banks 6.7.4 Carry Trade 6.7.4.1 Concept of Carry Trade 6.7.4.2 Practical example of carry trade executed pre 2008 crisis and post 2008 6.7.4.3 Advantage and Disadvantage of Carry Trades 6.7.4.4 Indian Coporates experience with carry trades 6.8.4.5 RBI regulations governing carry trades in India 6.7.5 Caps, Floor and Collars to hedge interest rates 6.7.6 Intutitive understanding of swap pricing 6.7.6.1 Understanding components of swap in Indian market 6.7.6.2 Deriving indicative swap pricing intuitively in one minute without any calculator : A must have skill for any treasury manager 6.7.7 Unique characterstics of Indian swap market due to convertibility of our curren cy 6.7.8 Concept of Natural Hedge and Dollarisation of balance sheet in India by corporate through swaps 6.8 Bloomberg / Thomson Reuters screenshort showing FX swap curve across the globe and India and correlation between swap curves 6.9 Concept of Particpatory Notes in Indian Equity / Debt segment and regulations governing them 6.10 Why Participatory Notes are so popular among FII s investing into India 7. Credit Derivatives 7.1 The basic concept 7.2 Role and structure of credit derivatives 7.3 Types of credit derivative 7.3.1 CDS (credit default swap) 7.3.2 TRS (total return swap) 7.3.3 CSO (credit spread option) 7.3.4 CLN (Credit link notes) 7.3.5 CDO (collateralized debt obligations) 7.4 Practical Concepts and examples 7.4.1 CDS Quoting conventions in real market 7.4.2 Viewing CDS curve in Reuters/Bloomberg 7.4.3 Understanding of change in CDS curve pre and post Global Financial crisis 7.4.4 Deriving India s CDS curve
7.4.5 Use of CDS curve to determine Risk Weighted Assets under Basel III framework by Banks 7.4.6 Indian Regulations on CDS 7.4.7 India s experience with CDS and why the market for CDS in India is yet to takeoff 7.4.8 Concept and example of CLN 7.4.9 Use of CLN to reduce balance sheet risk by Banks under Basel III 7.4.10 Practical examples of CLN and TRS 7.4.11 Why CDO market was liquid pre Global Financial Crisis and what changed after that? 7.4.12 ITRAXX Indices for trading credit 8. Other Derivatives 8.1 Weather derivatives 8.2 Energy derivatives 8.3 Insurance derivatives 9. Forward vs swap hedging fundamentals, netting vs hedging, hedging of net exposure Module IV 10. Taxation of derivative instruments 11. Learning from derivative mishaps 12. Derivatives Risk Management 12.1 Market Risk 12.2 Credit Risk 12.3 Liquidity Risk 12.4 Operational Risk 12.5 Enterprise Risk 12.6 VAR 13. Regulatory framework for derivatives 13.1 Indian Regulations governing derivatives 13.2 Sweeping reforms in Derivative market in US and it s global impact 14. International Swaps and Derivatives Association Master Agreement: 14.1 Role played by ISDA agreement during Global Financial crisis 14.2 Importance of ISDA after global financial crisis 14.3 Concept of Credit Support Annex and Global Collateral
15. Formulating the Dynamic Risk Management Policy by Corporates: 15.1 Identification and quantification of Exposure 15.2 Measuring the FX and Interest Rate Risk 15.3 Innovative Strategies for Risk reduction: 15.4 Change in commercial contracts 15.5 Establishing Benchmark / Budgeted Rate and how to outperform them 15.6 Determining Hedge Ratio throu gh Multi Factor Model and monthly evaluation. 15.7 Designing Hedge strategy 15.8 Establishing Controls in Company for managing risk