COURSE OUTLINE

Management Development Institute, Gurgaon

Financial Risk Management

BATCH: NMP-28
TERM: III
COURSE CREDIT: 1
NUMBER OF SESSIONS: 20
COURSE INSTRUCTOR: S. VEENA IYER
Phone: 0124-4560185 or Ext: 5185
E-mail: s.veena@mdi.ac.in
OBJECTIVES OF THE COURSE:
Managing business risks involves both reducing as well as embracing risk. This course attempts to introduce the
larger idea of how firms might view risk in their business and use financial derivatives to manage them. It attempts a
fine balance between institutional details, theoretical foundations, and practical applications. This course largely
focuses on market risks and credit risks faced by businesses and their management using financial derivatives
products. Notwithstanding the finance discipline underpinnings of this course, the perspective it takes is a business
one. Therefore, it has relevance for any business manager or decision maker even if he/she may not be involved in
actually creating and trading in derivative products. Emphasis in this course will be on identification of the sources of
financial risks; measurement of risks and management of risks. Derivative products are used widely by commodity
firms, investment banks as well as by individual and institutional investors.
TEXT BOOK: Fundamentals of Futures and Options Markets by John C. Hull, Eighth edition, Peason
SUPPLEMENTARY BOOKS:
1. Aman Chugh and Divik Maheshwari, Financial Derivatives: The Currency and Rates Factor, Pearson, 2013
2. Rajiv Srivastava, Derivatives and Risk Management, Oxford University Press, 2010. Selected chapters
from the above books will be used.
COURSE REQUIREMENTS:
The students will be assigned readings from the text book and course material pack; and they will be expected to
come to class prepared and ready to take part in class discussions. Regular attendance is essential for
understanding and performing well in this course. Students are hence, advised to not miss classes unless absolutely
essential. In case of such absence, it is up to the student to find out what has been covered in class and get up to
speed.
GRADING:
Your total score in the course will be determined by the following weights:

Assignments
20%

Quizzes
20%

Mid Term
30%

End Term
30%
ASSIGNMENT:
There will be a group assignment. The class would be split into groups. Each group will have one assignment during
the course period which will take the form of a 20 minute presentation based on an assigned issue/problem. The
assignment will be graded on the intellectual coherence and overall quality of the typed text plus the quality of the
presentation which will also include aspects such as presentational innovation and time management.
OTHER INFORMATION
Recommended to carry calculator (or lap top), and course material to all the sessions. The course outline and
accompanying assignment schedule are subject to change.
COURSE CONTENT:
1. Risk and Risk Management: Theory (2 sessions)
a) Why is financial risk management important?
b) Why do firms hedge financial risks?
c) Risk management in banks and other financial institutions
Case:


Advising on currency risk at ICICI Bank
Readings:

Owning the right risk: Kevin Buehler, Andrew Freeman, and Ron Hulme, Harvard Business Review,
September 2008.

The Six Mistakes Executives Make in Risk Management, Nassim N. Taleb, Daniel J. Goldstein, and Mark W.
Spitznagel , Harvard Business Review, October 2009.
2. Forwards and Futures (4 sessions)
a) Introduction to financial forwards and futures
b) Pricing and valuation of forwards and futures
c) Hedging and basis risk
d) Commodity futures and trading
Readings:

Chapters 2,3,5 of text

Financial futures: Scott P Mason, Harvard Business School, December 1999

Derivatives can be hazardous to your health: The case of Metallgesellschaft.

3.
a)
b)
c)
d)
e)
Cases:

4.

Options (3 sessions)
Introducing Options: Call and Put
Options arbitrage relationships
Option pricing models: BOPM & BSM
Options prices and valuations of options
Options Greeks and delta hedging
Chapters 9-15, 17, 19 of text (selected portions only, will be informed)
Larry Steffen: Valuing Stock Options in a Compensation Package
Consolidated case: (1 session)
Hedging Currency risk at AIFS
MID-TERM EXAMINATION

5. Swaps (3 sessions)
a) Introduction to Swaps
b) Types of Swaps : Interest rate swap and currency swap
c) Pricing and valuation of swaps
Case:

B.F. Goodrich-Rabobank Interest rate swap

Advising on currency risk at ICICI Bank (revisited)

Readings:

Chapter 7 of text

Interest rate swaps, by Westpac Banking Corporation

Foreign Currency Swap, Harvard Business School, 1996

6. Credit Risk Management and Credit Derivatives (3 sessions)
a) Managing credit risk and credit derivatives
b) Credit Default Swaps(CDS) and Collateralized Debt Obligations (CDOs)
Cases:

Saginaw Parts Co. and the General Motors Corp. CDS

Readings:

Chapter 23 of text
7. Interest Rate Derivatives (2 sessions)
a) Interest rate futures
b) Hedging strategies using interest rate futures
c) Interest rate futures in India
Readings:

Chapter 6 of text

Interest Rate Futures, National Stock Exchange, India

8. Project Work and Presentations (2 sessions)