About the Book

The book Financial Derivatives: A Case Study Based Learning is primarily designed for learners who want to make a career in the field of financial management. It provides clear and concise explanations of different derivative instruments and how those can be used for the purpose of risk management. Adequate amount of case studies, numerical illustrations, and graphical demonstrations have been provided in the book to strengthen the theoretical and practical understanding of the learners. In addition, Excel-based solutions of practical problems given in the book will help learners in putting the theories into practical applications. The book serves as an ideal introduction for the students who are new to the subject. In addition, it serves as an essential reference for the students who are already exposed to this field.

About the Author

Dr. Manu Sharma has more than 12 years of professional experience in various fields in finance, such as investment banking, M&A, financial derivatives and financial engineering, security analysis, and capital market. He has worked in a number of financial organizations including Trudeau & Trudeau Associates and GE Capital International Services. Currently, he is a faculty in the finance department of the University Institute of Applied Management science, Punjab University, India. Dr. Manu Sharma completed his Bachelor of Engineering (Chemical) from the Punjab University in 1999. He did his MBA (Finance) from the University of Massachusetts, Boston in 2002. He also completed his Doctorate in Finance from the SMC University, Switzerland in 2009. His books include Mergers & Acquisitions and Corporate Valuation: An Excel Based Approach, Risk Management with Financial Derivatives, and Due Diligence in Private Equity.

Table of Contents:
Chapter 1: Fundamentals of Options 1.1 Fundamentals of Options 1.1.1 American and European Options 1.1.2 Long Position and Short Position in Options 1.2 Long Call Option 1.2.1 Hedging with Long Call Options 1.2.2 Long Calls Instead of Shares 1.3 Short Call Option 1.4 Long Put Option 1.5 Short Put Option 1.6 Value of Option 1.6.1 Intrinsic Value of an Option 1.6.2 Time Value of an Option 1.7 In-the-Money, At-the-Money, and Out-of-the- 1.8 Summary 1.9 Questions Multiple-Choice Questions Long-Answer Questions Chapter 2: Binomial Option Pricing Model 2.1 Binomial Option Pricing Model 2.1.1 Derivation of Binomial Model and Hedge Ratio 2.2 Single Stage Binomial Call Option Pricing Model 2.3 Double Stage Binomial Call Option Pricing Model 2.3.1 Hedge Ratio for Double Stage Model 2.4 Put Option Binomial Pricing Model 2.4.1 Single Stage Put Option Binomial Pricing Model 2.4.2 Double Stage Put Option Binomial Pricing Model 2.5 Arbitrage in Binomial Option Pricing Model 2.6 Summary Table of Contents 2.7 Questions Multiple-Choice Questions Long-Answer Questions Chapter 3: Black-Scholes Option Pricing Model 3.1 Black-Scholes Option Pricing Model 3.1.1 Assumptions of the Model 3.1.2 Pricing of Option with Black-Scholes Model (Time Value and Intrinsic Value) 3.2 Options Variables 3.2.1 Stock Price (Delta) 3.2.2 Gamma 3.2.3 Theta (Time) 3.2.4 Vega (Standard Deviation) 3.2.5 Rho (Risk-Free Rate) 3.3 Put-Call Parity 3.4 Arbitrage In Options 3.4.1 Arbitrage Using Call Options 3.4.2 Arbitrage Using Put Options 3.5 Delta and Gamma Hedging 3.6 Summary 3.7 Questions Multiple-Choice Questions Long-Answer Questions Chapter 4: Advanced Option-Based Hedging Strategies 4.1 Bullish Option Strategies 4.1.1 Long Call 4.1.2 Short Put 4.1.3. Covered Call 4.1.4 Protective Put 4.1.5 Bullish Spreads (Also part of Bullish Option Strategies) 4.1.6 Bull Call Spread and Bull Put Spread 4.1.7 Strap 4.2 Bearish Option Strategies 4.2.1 Bear Call Spread 4.2.2 Bear Put Spread 4.2.3 Strip 4.3 Neutral Option Strategies 4.3.1 Long Straddle 4.3.2 Short straddle 4.3.3 Long Strangle 4.3.4 Short strangle 4.3.5 Call Time Spread 4.3.6 Put Time spread 4.3.7 Call Ratio Vertical Spread 4.3.8 Put Ratio Vertical Spread 4.3.9 Long Call Condor 4.3.10 Short Call Condor 4.3.11 Short Call Butterfly 4.3.12 Short Put Butterfly 4.3.13 Long Call Butterfly 4.3.14 Long Put Butterfly 4.4 Summary 4.5 Questions Multiple-Choice Questions Long-Answer Questions Chapter 5: Currency Options 5.1 Introduction to Currency Options 5.1.1 Advantages of Currency Options 5.1.2 Disadvantages of Currency Options 5.1.3 American and European Currency Options 5.1.4 Long and Short Positions in Currency Options 5.2 Long Currency Calls 5.2.1 Hedging with Long Currency Calls 5.3 Short Currency Calls 5.3.1 Hedging with Short Currency Calls 5.4 Long Currency Put Options 5.4.1 Hedging with Long Currency Put Option 5.5 Short Currency Put Options 5.5.1 Hedging with Short Currency Puts 5.6 Currency Options Strategies 5.6.1 Straddles 5.6.2 Strangles 5.7 Put-Call Parity in Currency Options 5.8 Garman-Kohlhagen Foreign European Style Currency Option Pricing Model 5.9 Summary 5.10 Questions Multiple-Choice Questions Long-Answer Questions Chapter 6: Interest Rate Options 6.1 Interest Rate Options 6.2 Interest Rate Long Call Options 6.2.1 The Money Status of Interest Rate Long Call Options 6.2.2 Hedging with Interest Rate Long Call Options 6.3 Interest Rate Short Call Options 6.3.1 Hedging with Interest Rate Short Call Options 6.4 Interest Rate Long Put Options 6.4.1 The Money Status of Interest Rate Long Put Options 6.4.2 Hedging with Interest Rate Long Put Options 6.5 Interest Rate Short Put Options 6.6 Caplets 6.7.1 Hedging with Florets 6.8 Black Model For Pricing Interest Rate Options 6.9 Summary 6.10 Questions Multiple-Choice Questions Long-Answers Questions Chapter 7: Futures and Forward Contracts 7.1 Introduction to Futures Contract 7.1.1 Types of Futures Contracts 7.1.2 Advantages and Disadvantages of Futures Contracts 7.2 Long Hedging with Futures Contracts 7.3 Marked to Market Analysis of Long Futures Contracts 7.4 Short Hedging 7.5 Marked to Market Analysis of Short Futures Contracts 7.6 Perfect Hedging and Cross Hedging 7.7 Hedge Ratio 7.8 Basis Hedge 7.8.1 Basis Short Hedging 7.8.2 Basis Long Hedging 7.8.3 Golden Rules of Hedging with Basis 7.9 Introduction to Forward Contracts 7.9.1 Advantages and Disadvantages of Forward Contracts 7.9.2 Long Forward Contracts 7.9.3 Short Forward Contracts 7.10 Valuation of Forward/Futures Contracts 7.10.1 Variables Affecting Valuation of Forward/Futures Contracts 7.11 Arbitrage on Forward/Futures Contracts 7.12 Options on Futures 7.12.1 Black’s Model for Pricing Options on Futures 7.13 Summary 7.14 Questions Multiple-Choice Questions Long-Answer Questions Chapter 8: Currency Forwards and Futures 8.1 Introduction to Currency Futures 8.1.1 Market Participants in Currency Futures 8.2 Long Currency Futures 8.2.1 Hedging with Long Currency Futures 8.3 Short Currency Futures 8.3.1 Hedging with Short Currency Futures 8.4 Valuation of Currency Futures Contracts 8.5 Basis Currency Risk and Basis Currency Hedging 8.5.1 Hedging with Currency Basis 8.6 Hedge Ratio for Currency Futures Contracts 8.7 Introduction to Currency Forward Contracts 8.7.l Advantages and Disadvantages of Currency Forwards 8.8 Long Hedging Currency Forward Contracts 8.9 Short Hedging Currency Forward Contracts 8.10 Valuation of Currency Forward Contracts 8.11 Arbitrage in Currency Forwards/Futures 8.12 Non-Deliverable Forward Contracts 8.13 Summary 8.14 Questions Multiple-Choice Questions Long-Answer Questions Chapter 9: Interest Rate Futures 9.1 Introduction to Interest Rate Futures 9.1.1 Treasury Bills 9.1.2 Treasury Bonds 9.2 Valuation of Bonds 9.3 Treasury Bill 91 Days Maturity (Short-Term Bond) 9.4 Treasury Bonds 7% Semi-Annual 10 Years Maturity (Long-Term Bond) 9.4.1 Invoice Price 9.4.2 Cheapest to Deliver Bond 9.5 Short Hedging with Interest Rate Futures 9.6 Long Hedging with Interest Rate Futures 9.7 Hedge Ratio 9.7.1 Hedge Ratio – Complete Hedge of Duration 9.7.2 Hedge Ratio – Target Hedge with Fixed Duration 9.8 Summary 9.9 Questions Multiple-Choice Questions Long-Answer Questions Chapter 10: Swaps 10.1 Interest Rate Swap 10.2 Structuring Interest Rate Swaps 10.2.1 Fixed to Floating Interest Rate Swap 10.2.2 Floating to Fixed Interest Rate Swap 10.3 Pricing of Interest Rate Swap at Outset 10.4 Value of Interest Rate Swap during its Life 10.5 Introduction to Currency Swap 10.5.1 Four Scenarios of Interest Rate Payments in Currency Swap 10.6 Determining Coupon Rates in Currency Swap 10.7 Valuation of Currency Swap 10.8 Swaption: Options on Interest Rate Swap 10.8.1 Swaptions for Assets 10.8.2 Swaptions for Liabilities 10.8.3 Valuation of Swaptions (Black’s Model) 10.9 Credit Default Swap (CDS) 10.10 Total Return Swap 10.11 Summary 10.12 Questions Multiple-Choice Questions Long-Answer Questions