What is particularly compelling about this book is the clarity with which Wilmott writes.
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Derivatives textbooks are all too often encumbered with language and mathematics seemingly designed to exclude a wider audience. Wilmott clearly understands the breadth of appeal of these products and the necessity for making the topic as accessible as possible. Reading this book first provides the context for understanding the mathematics and the nuts and bolts of modern financial risk management. Nassim Taleb is a unique figure in the world of financial risk management.
He is a trader with a comprehensive understanding of the mathematics of derivatives. Dynamic Hedging is the embodiment of the sophisticated techniques that a derivatives trader and risk manager must use on a minute-by-minute basis. It is one thing to read about the options greeks in a textbook or on this web site. This book shows you how to use them the way that they are used by the most successful derivatives traders in the world with real-life examples providing the context. The only criticism is that the first edition contains some typographical errors in the technical examples that may elude less sophisticated readers.
Advances in technology and a growing awareness in the executive suite of the importance of financial risk management have also contributed to the popularity of Value-at-Risk. Value-at-Risk provides an in-depth background of the different techniques one can use to evaluate VaR, emphasizing the benefits and drawbacks of each approach. There is also a good analysis of the evolution of regulatory requirements for financial institutions and derivatives problems that have occurred in recent memory, some of which could have been reduced or avoided by the proper use of VaR.
It remains controversial. Monte Carlo simulation is a technique that is useful in finance for pricing derivatives and measuring risk. Quantitative Risk Analysis iintroduces the concept of Monte Carlo simulation to the reader who is familiar with the basic principles of statistics.
However, the applicability to financial problems of Quantitative Risk Analysis is limited. It is oriented more to the needs of the industrial engineer. There are other books, including most recently a publication on the usefulness of simulation in finance published by Risk Publications, that are more suited for the practitioner. Quantitative Risk Analysis is also a solid manual for people who already have experience using Monte Carlo simulation and who require a reference text for a variety of statistical distributions.
Ravindran, K. This book is an overview of different techniques used for valuing derivative products, including Monte Carlo simulation. It presents a uniform framework for evaluating and comparing different products in an easy-to-read text peppered with frequent examples. It is most suited for risk managers and systems developers looking for an overview of derivatives pricing that is not too complicated.
Traders will find the material not directly applicable enough. You will not find any detailed information about how to interpret or use the prices that you obtain using these formulae. What you will find is a logical framework that matches the evolution of the prices and Visual Basic code to match each price. A brief but substantive book specializing, again, in presenting a uniform framework for pricing financial derivatives. For what you get, it is a tad pricy compared to the Haug textbook.
This is also a product that will be useful for systems developers and risk managers.
Credit Derivatives: Risk Management, Trading and Investing by Geoff Chaplin
Hull, John C. In practice, being able to price options is not enough for the risk manager when he has access to cutting-edge desktop computer applications.
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The risk manager must be able to intuitively understand the behavioral characteristics of the products for which he is responsible. While Options, Futures and Other Derivative Securities is a necessary primer on the mathematics of derivatives, it must be placed in the context of the rigors of practice. The Bank for International Settlements BIS is charged with developing policies that ensure the stability of the global financial system.
Part of that mandate involves the establishment, maintenance and evolution of policies regarding the capital requirements of financial institutions. The book is best for its description of the rules and the way they have developed. This is an excellent desk reference for the pricing and risk management of swaps in a variety of asset classes and related securities, such as structured notes. A classic practitioner text.
Fabozzi, Frank J. Fabozzi Assoc. One of the textbooks used in the Chartered Financial Analyst program, Measuring and Controlling Interest Rate Risk is a primary textbook for interest rate risk identification and mitigation, including the use of Duration and Convexity to identify the sensitivity of cash flows to movements in interest rates.
A solid introduction. A textbook featuring case studies in derivative products and risk management with cases taken from contemporary investment bank situations.
Peter Tufano, a professor at Harvard Business School, is a well-recognized educator in financial risk management. Schwartz, Robert J. A collection of articles on the management of derivatives operations intended for lawyers and senior executives. The analysis of legal issues facing derivatives is outstanding. There is also a great article by Jeff Selzer and Charles Smithson. Smithson is a well-recognized name in global derivatives having published several books including Managing Financial Risk cited below , from his work with the International Swaps Dealers Association and from his position as a Managing Director in charge of derivatives education at CIBC World Markets.
Alexander, Carol ed. One of the textbooks used in the Financial Risk Manager program, certified by the Global Association of Risk Professionals, this book has a slightly more academic focus. An example of this is the discussion of econometrics and volatility forecasting.
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It does have a comprehensive overview of equity markets and emerging markets. Look for further updates of this book to account for contemporary developments in the global derivatives markets.
An outstanding description of the dimensions of financial risk management in a variety of asset classes, Smithson and Smith write a book that is designed for the risk practitioner. Full of examples, both contrived and actual, Smithson and Smith have written a textbook that makes it easier for the risk manager to translate their lessons into practical everyday use than other more academically oriented textbooks available. Check out the section on deciphering financial statements for clues about financial risk management and potential financial risks facing the firm.
The accompanying DCF model download allows you to complete computations automatically for error-free analysis and valuation of real companies. The model ensures that all important measures, such as return on investment capital and free cash flow are calculated correctly, so you can focus on the company's performance rather than computational errors.
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