WORK PLAN

SEMESTER 1 2015/2016
FINANCIAL RISK MANAGEMENT
LECTURER: RABIHAH BINTI MD.SUM
WEEK
1

2-3

TOPIC AND SUBTOPIC

OBJECTIVES

HOUR

METHOD

Describe derivatives instruments.

Describe type of derivatives
instruments.
Describe main players in derivatives
market.
Differentiate between commodity and
financial derivatives.
Understand how global derivative
market works and its evolution.

Lecture

P/Point

Tutorial

Tutorial

Forward Contract.

Introduction to forward contract.

Forward contract payoff profiles.

Forward rate agreement (FRA).

Forward foreign exchange.

Understand forward contracts

Understand profit and loss of forward
contracts.
Understand how to manage interest rate
risk and foreign exchange price risk
using forward contracts.

Lecture

4
4

Tutorial (A)
Tutorial (B)

Futures Contract.

Introduction to futures contract.

Comparison between futures and forward

contracts.

Futures contract payoff profiles.

The mechanics of futures market:

Reading a future contract.
Margin requirements.
Futures trading: mark-to-market and
daily settlement.

Stock Index Futures

Understand futures contracts

Understand profit and loss of futures
contracts.
Understand how to trade futures
contract.
Understand how to manage equity risks
using stock index futures.

Lecture

2
2

Tutorial(A)
Tutorial(B)

Derivatives: Introduction and Overview.

What are derivatives instruments?
Common derivatives instruments.
Evolution of derivatives instruments.
Main players in derivatives markets.
Commodity versus financial derivatives.
Types of risks.
Overview of global derivatives trading.

LST

P/Point
Excel
Spreadsheet

NOTES
Group
formation.
Number of
people in a
group:
Minimum=3
Maximum=5

Group
assignment title
given.
Quiz 1 on week
3.
Assignment 1
on week 3

P/Point

Excel
Spreadsheet

Assignment 2

Forward and Futures Prices.

Determining forward and futures prices

Cash and carry.
Reverse cash and carry.

Arbitrage pricing

Understand how to prices forward and

futures contract.
Know the determinants of the price of
forward and futures contracts.
Understand arbitrage and how to
conduct arbitrage trading.

Lecture

2
2

Tutorial(A)
Tutorial(B)

Options
Introduction to options.
Types of option:
Put option
Call option
Put and call options payoff diagram.

Understand what is option and different

types of options.
Able to calculate profit and loss of call
and put options.
Able to develop call and put options
payoff diagram.
Able to construct hedging strategy
using options.

Lecture

2
2

Tutorial(A)
Tutorial(B)

Know how to use the BOPM to price

options.
Understand the determinants of the
price of an option under BOPM.
Know the limitations of the BOPM.

Lecture

Options strategy and profit diagram

7

Binomial Option Pricing Model (BOPM)

Introduction to BOPM
Determinants of BOPM
BOPM call option pricing:
One period BOPM
Two period BOPM
Multi period BOPM
BOPM put option pricing:
One period BOPM
Two period BOPM
Multi period BOPM

P/Point

Quiz 2

P/Point

Excel
Spreadsheet

Assignment 3

P/Point
Quiz 3

2
2

Tutorial (A)
Tutorial (B)

Lecture

Excel
Spreadsheet

Assignment 4

Limitations of BOPM.
8

MID SEMESTER EXAM

MID SEMESTER BREAK

10-11

Black-Scholes Option Pricing Model (BSOPM)

Introduction BSOPM.
Determinants of BSOPM
Call option pricing using BSOPM.
Put option pricing using BSOPM.

Know how to use BSOPM formula to

price options
Understand determinants of the price
of an option under BSOPM.
Understand limitations of BSOPM.

P/Point
Quiz 4 on week
11

Tutorial(A)

Excel

Assignment 5

12

13

14

Extension the BSOPM.

Hedge ratio.
Implied volatility
Put Call Parity
Options Greeks: delta, theta, rho and vega.
Limitations of BSOPM

Know how to determine number of

options to buy using hedge ratio.
Know how to calculate implied
volatility.
Understand how to manage risks using
options Greeks.

Tutorial(B)

Swaps.
Introduction to swaps.
Interest rate swaps.
Mechanics of interest rate swaps.
Cash flow of interest rate swaps.
Hedging using interest rate swaps.
Other swaps
Foreign currency swaps.
Credit swaps

Understand what is swaps.

Know different types of swaps.
Understand the mechanism of swaps.
Know how to calculate and
demonstrate swaps cash flows.
Able to manage interest rate risks using
interest rate swaps.

Lecture

2
2

Tutorial(A)
Tutorial(B)

Islamic Perspectives of Derivatives and Hedging.

Permissible and non-permissible risks.
Necessary features for Islamic financial
instruments.
Islamic instruments for hedging.

Understand Islamic perspectives on

risks.
Know the criteria or features for a
financial product to be considered
acceptable (halal).
Know Islamic financial instruments
that can be used to manage risks.

Lecture

2
2

Tutorial(A)
Tutorial(B)

Students
presentation

Group Assignment Presentation

Spreadsheet

on week 11

P/Point

Excel
Spreadsheet

P/Point

P/Point