Corporate Fin Mgt NDLM.PDF

Learning Unit - 6

Instructions to Faculty

Derivatives

General Instructions:

Derivatives are a relatively new subject. Faculty should take care to ensure that basic
concepts are explained with simple examples.

Faculty may introduce the topic with a presentation on the overall objectives of the
module. This presentation may take approximately 45 minutes and may include the
objectives given below.

Objectives

At the end of this learning unit, the participants will be able to:

1. Understand reasons for risk management


2. Understand the background of derivatives.


3. Understand option theory.


4. Use complex option pricing model and the Black-Scholes Model.


5. Understand forward contracts, futures and swaps under Hedging.


6. Use derivatives to reduce risks.

Presentation

The introductory presentation outlining the objectives of the module may be followed
with a more detailed presentation focusing on the following points:

• Meaning and background of derivatives


• Time between derivatives and risk management.


• Reasons to manage risk.


• Using derivatives to reduce risks


• Option and Introduction to option pricing models: call option, covered options,
  naked options, put option


• The Black-Scholes option pricing model.
  
  
  • A risky derivative swaps.
  
  
  • Natural hedges
  
  
  • Comparative advantages in hedging; long hedges; short hedges; perfect
    hedges.
  
  
  • Future market, hedging with futures.
  
  
  • Non-symmetric hedge.
  
  
  • Forward contracts.