COURSE SYNOPSIS

UNIVERSITI SAINS MALAYSIA

School of Management

In recent years, our derivatives market has gone through a tremendous evolution
that involves huge transactions in short period of time. To achieve the importance
of this financial derivatives market this course is meant to give knowledge,
understanding and exposure to students about derivatives concepts. This will
equip students with risk management tools on hedging using the derivatives
market instruments that are very useful to the students as they are specializing in
finance as a major. This is to ensure that students are equipped with understanding
of the concepts and able to analysis derivatives in order for them to compete with
the outside world in term of managing risks. At the beginning of this course,
students will be introduced to the futures instruments and at a later part with a
more challenging, complex and innovative options instruments.

COURSE OBJECTIVES

BACHELOR OF MANAGEMENT
Semester II, Academic Year 2013/2014
COURSE OUTLINE
AFW 368 Financial Derivatives

Ahmad Zainuddin Bin Salleh

E-mail: zainuddin@usm.my,
azsalleh2002@yahoo.com
Tel: 017-5859011

1.

To give exposure on the derivatives market to the students

2.

To give exposure on the derivatives instruments to students

3.

To expose students on the strategies used in derivatives trade

4.

Giving the basic knowledge to students about the valuation technique of

derivatives instruments

5.

Giving the basic understanding on how derivatives instruments can be

used as a risks management tool in investment portfolio

LEARNING ACHIEVEMENT
1.

Able to understand the importance of the existence of the derivatives

market as part of the financial and capital market.

2.

Able to understand the types of derivatives instruments such as futures

and options including its advantages and disadvantages.

3.

Able to identify and select the correct strategies with the right
instruments in different financial situation for example straddle, strangle,
condor and many others.

4.

Able to apply the knowledge of hedging methods in equity futures,

commodity futures, interest rates futures, foreign exchange futures and
many more.

5.

Able to identify the appropriate hedging ratios and strategies for risks
management in all types of investments.

Course Objective

Learning Achievement

1, 2, 3

1, 2, 3, 4

1, 2, 3, 4, 5

1, 2, 3, 4, 5

COURSE ASSESSMENT

1.

Project paper

20%

2.

Mid-semester examination

20%

3.

Final semester examination

60%
100%

Course Assessment

Teaching and
Learning Technique
1 (80%)
2(20%)
1(60%)
2(20%)
3(20%)
1 (50%)
2 (20%)
3 (20%)
4 (10%)
1 (50%)
2 (20%)
3 (20%)
4 (10%)
1 (50%)
2 (20%)
3 (20%)
4 (10%)

Learning Achievement

Teaching and
Learning Technique

Tutorial

1,2, 3, 4

1, 2, 3, 4

Project

1, 2, 3, 4

1, 2, 3, 4

1, 2, 3

1, 2, 3, 4

1, 2, 3, 4, 5

1, 2, 3, 4

Mid-semester
Examination
Final Semester
Examination

Teaching and Learning Technique:

1.
Lecturing
2.
Tutorial
3.
Learning of basic problems
4.
Case research
5.
Project
6.
Project Presentation
7.
Computer Lab
8.
Library research
9.
Industrial Trainning
Stages of Learning:
1. Memory recall
2. Basic Understanding
3. Permanent Understanding
4. Analyse
5. Application
6. Synthesis

DESCRIPTION OF ASSIGNMENT
Tutorial: Issues or questions are given at the end of each chapter. Students
need to voluntarily themselves to present the task given while others will ask
questions regarding issues that they have learnt or dont understand. Students
involvement/participation in tutorial sessions and how they deliver the issues
based on their understanding is a must.
Project 20%: In groups of three, students are assigned with a choice either
to write a project paper titled The development of Bursa Malaysia
Derivatives and its instruments OR writing a review on research findings on
selected titles of derivatives journals research paper with each student must
reviewed one paper and therefore per group there will be three selected
research papers to be reviewed.

Mid-semester examination 20%:

Duration
: 2 hours
Type of Questions: Objectives & Structured
Coverage
: Derivatives market, Futures instruments and the hedging,
speculating, arbitraging strategies
Level
: Understanding, analytical thinking and application
Final-Semester Examination 60%:
Duration
: 3 hours.
Type of Questions: Objective & Structured
Coverage
: All topics learnt.
Level
: Understanding, analytical thinking and application.

Attendance
Students need to attend tutorial the minimum of 70% of the full attendance in
order to sit for the final examination. Students can be barred from taking the final
examination if they are failing to do so. Attendance to the SIDC seminar is
compulsory as well.
Optional:
Students are advised/encourage to sit for the SIDC Futures & Options: Module 14
SIDC examination before the final exam to familiarize with the multi choice
(mcq) type of questions. Exam fee: RM200 (Please refer to www.sidc.com.my for
details). This is to test your understanding in the subject and course taken and a
value-added during job seeking after graduation.
Seminar:
A compulsory seminar conducted by Securities Commission on topic Futures &
Options will be held on selected Saturday, time between 9am till 5pm (lunch will
be provided plus goodie bag given if your are lucky) on week 11 th, 12th or 13th..
Attendance will be taken on both morning and evening sessions.

CONTENTS OF COURSE
Weeks

Topic of Lectures

Chapter

Derivatives: Introduction, Overview & Ethics

(Obiyathulla & Module 1 SIDC)

1,2

Malaysian Derivative Markets and Trading Refer:

www.bursamalaysia.com, www.sidc.com.my,
www.min.com.my, www.sc.com.my & all Malaysian
Investment Banks website
2

Fundamentals of the Futures Market (Module 1&2 SIDC)

Fundamentals of Interest Rate Futures (Obiyathulla &

Module 2 SIDC)

Interest rate futures

3-month KLIBOR futures contract

Hedging and arbitraging with KLIBOR

Single Stock Futures SSF & Bond Futures (Obiyatulla &

Module 2 SIDC)

Introduction SSF & Bond contracts

Pricing a SSF contract

Hedging, arbitraging & speculating with SSF

Introduction to Options (Obiyatulla & Module 3 SIDC)

The concept, mechanics and participants

Calls & Puts

The clearing process

Payoffs to Investing in Stocks Options

Principles of futures contract pricing

Expectation and Option Position

Uses and applications

Option Moneyness

Stock Index Futures (Obiyathulla & Module 2 SIDC)

Stock Indexes FKLI and their futures contracts

Uses of stock index FKLI futures

Hedging, arbitraging and speculating with stock

index FKLI futures

Commodity Futures (Obiyathulla & Module 2 SIDC)

3
(appendix)

Mid-Semester Examination

Option Contracts: Specification & Trading (Obiyatulla &

Module 3 SIDC)

Trading Options Contracts

Option Premiums & Underlying Asset Price

American Style Options & Early Exercise

Crude Palm Oil Futures Contract FCPO

Pricing FCPO Contracts

Intermediation and Margining

Hedging, arbitraging and speculating with

FCPO

Contract Specifications

10

Basic Option Strategies & Payoff (Obiyatulla)

Uncovered/Naked Positions

Hedge Strategies-Portfolio Insurance

Hedging a Short Stock Position

Conversion Strategy

15

Replication and Synthetics

Put-Call Parity and Arbitrage

Final Semester Examination

MAIN TEXT BOOK

11

12

13

14

Option Spread & Combinations Strategies (Obiyatulla)

Bull & Bear Spread

Straddle Strategies

Strangle Strategies

Covered Call Strategy

Option Pricing (Obiyatulla)

Introduction

The Binomial Option Pricing Model

Probabilities & Volatility

Volatility & BOPM Option Value

Pricing Put Options with BOPM

The Black-Scholes Option Pricing Model (Obiyatulla)

Obiyathulla Ismath Bacha, Financial Derivatives: Markets and Applications in

Malaysia, 3nd Ed., Mc Graw Hill 2012
Malaysian Futures and Options, Regulations-Module 1, Suruhanjaya Sekuriti,
SIDC Fourth Print 2007.
Malaysian Futures and Options, Futures-Module 2, Suruhanjaya Sekuriti, SIDC
Fifth Print 2007.

Malaysian Futures and Options, Options-Module 3, Suruhanjaya Sekuriti, SIDC

Fifth Print 2008.
ADDITIONAL REFERENCES
Strong, Robert A. Derivatives: An Introduction, Thomson-South Western, 2 nd. Ed.
2005.
Hull, John C, Options, Fundamental of Options and Futures, 5th Ed. Prentice
Hall, 2005.

Hull, John C, Options, Futures, and Other Derivatives, 6th Ed Pearson 2006

The Underlying Logic of BSOPM

Underlying Assumptions

Pricing Put Options

Kolb, Overdahl, Financial Derivatives: Pricing & Risk Management, Wiley 2010

Determinants of Options Prices

Rosalan Ali, Shafinar Ismail: Understanding Malaysia Derivatives, Principle &

Practice, Pearson Prentice Hall 2006

Replication, Synthetics and Arbitrage (Obiyatulla)

Hull, John C, Risk Management and Financial Institutions, Pearson 2007

10

Derivatives: Valuation and Risk Management, David A. Dubofsky, Thomas W.

Miller, Jr., Oxford 2003

An Introduction to Derivatives and Risk Management, Chance & Brooks, South

Western Cengage Learning, 9th Edition, 2013
Jacinta Chan: Everything Technical Analysis, How to Trade Like a Professional.
Pearson Prentice Hall, 1st Edition 2006.