L T P/S SW/F TOTAL
W CREDIT
UNITS
3 - - - 3
Course Title: Financial Engineering Course Code: FIBA704 Credit Units: 3 Level: PG
Course Objectives: Finance has evolved as an exciting discipline in terms of innovations in the recent past. The objective of the course is on the use of
mathematical models on financial instruments and knowledge of innovative tools of financial engineering called derivatives. Financial Engineering starts where
financial analysis ends.
Pre-requisites: The prerequisites are knowledge of Financial Systems , Financial Markets, Fixed Income Securities and Financial Derivatives. Besides, basics
of foreign exchange rates and statistical tools like mean, variance, probability etc should be known to the student. Knowledge of Financial Modeling is also
must.
Student Learning Outcomes: This course should enable students to think in terms of innovative solutions to financial problems with particular emphasis on
understanding new risks, which the changing scenario of finance is creating for individuals and firms. Through this course, students should be able to develop
skills in forming effective strategies to cope with the changing risk environment.
Course Contents/Syllabus:
Weightage (%)
Module I : Introduction to Financial Engineering & Risk Management 15
Descriptors/Topics
Changing Environment and Increasing Price Risks, Financial analysis vs financial engineering ,Financial Engineering as a response to Increased
Risks, Knowledge base of a financial engineer-mathematical & statistical skills, Modeling skills, Product Knowledge, knowledge of relevant
technology, accounting, tax and legal; Types of Risks and Risk Management, Tools of Risk Management; Discussion on existing financial
instruments
Module II: Futures and Forwards 20
Descriptors/Topics
The Futures Markets, Buying and Selling Futures, Static and dynamic hedging ,Devising a Hedging Strategy Using Futures, Stock Index
Futures, Value at Risk (VaR), Short Term and Long Term Interest Rate Futures, Foreign Currency Futures and Commodity Futures
Module III : Options 25
Descriptors/Topics
Options Markets; Properties of Stock Option Prices; Option Pricing Models – Binomial Model, Black-Scholes; Model, Single Period Options –
Calls and Puts, Payoff Diagrams of Simple and Complex Option Strategies, Cash Settled Options, Multi-Period Options – Caps, Floors, Collars,
Captions, Swaptions and Compound options, Cross-currency Futures and Options.
Module IV : Swaps & (Forward Rate Agreements)FRAs 20
Descriptors/Topics
Structure of a Swap, Interest Rate Swaps, Currency of Swaps, Commodity Swaps, Other Swaps, Credit Risk and Credit Derivatives, Credit
default swaps, Role of a Swap Dealer. Basics of FRAs
Module V: Other Innovations and recent trends 20
Descriptors/Topics
Debt Market Innovations, Mortgage Backed Securities, Hybrid Securities, Asset-Liability Management, Exotic Options, Synthetic Instruments,
Developments in Equity-Based Strategies, Direct and Cross Hedges, Future Trends and Issues in Financial Engineering.
Pedagogy for Course Delivery: The course will be delivered mainly through lectures, videos and supported with practical examples from the current business
environment. This course will also be supported by Derivagem software which is used for pricing of derivative products.Also to include case studies, syndicate
session, quizzes and written assignments.
Assessment/ Examination Scheme:
Theory L/T (%) End Term Examination
100 70%
Theory Assessment (L&T):
Continuous Assessment/Internal Assessment End Term Examination
Components (Drop down) Class performance Group Presentation CT EE
Weightage (%) 10 10 10 70
Text & References:
Financial Engineering by Lawrence C. Galtiz, Irwin
Marshall, J. F. and Bansal, V. K. 2006. Financial Engineering: A Complete Guide to Financial Innovation, Prentice Hall of India.
Hull, J. C. 2013, Introduction to Futures and Options Markets, 9th edition, Prentice Hall of India.
Edwards, F. R. and Ma, C. W. 1992, Futures and Options, McGraw-Hill International.
Rebonato, R. Interest Rate Option Models: Understanding, Analyzing and Using Models for Exotic Interest Rate Options, John Wiley and Sons.
Kolb, R. W. Understanding Futures Markets, Prentice Hall of India.
Paul Glasserman, Monte Carlo Methods in Financial Engineering, Springer.
Riccardo Rebonato, Volatility and Correlation, 2nd edition, Wiley, 2004.
Damiano Brigo and Fabio Mercurio, Interest Rate Models - Theory and Practice, 2nd edition, Springer, 2006.
Riccardo Rebonato, Modern Pricing of Interest-Rate Derivatives: The LIBOR Market Model and Beyond, 1st edition, Princeton University Press, 2
Philipp J. Sconbucher, Credit Derivatives Pricing Models, 1st edition, Wiley, 2003.
Investment Science by David G. Luenberger
Investments by Bodie, Kane and Marcus
Quantitative Finance by T.W. Epps
All about Investing: The easy way to get started by Esme Faerber, McGraw Hill
Any other Study Material:
Articles from Journal of Finance
Articles from International Journal -Finance India
Business newspapers
Yahoo finance (http://finance.yahoo.com/)
Investopedia (www.investopedia.com) - Investing 101 ,Stock Basics ,Basic Financial Concepts, Bond & Debt Basics ,IPO Basics, Brokers and
Online Trading, Economics Basics, Reading Financial Tables, Understanding the P/E Ratio
Google Finance (www.google.com/finance)
Capital Ideas: The Improbable Origins of Modern Wall Street by Peter Bernstein
When Genius Failed: The Raise and Fall of Long-Term Capital Management by Lowenstein
