Customer Reviews

Derivatives Markets (2nd Edition)

5 star:		(14)
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3 star:		(2)
2 star:		(1)
1 star:		(1)

 

 

Far too many books on derivatives are written by academics who claim to be writing for intelligent professionals but are in fact really trying to impress their colleagues. This book is a wonderful exception to that general rule. It is written by a master teacher who understands the importance of knowing several different ways to solve problems, and who provides numerous examples so that the reader can check his/her own answer. The book also provides software in VBA (Visual Basic for Applications) so that the reader can experiment with the results explained in the text and apply them to his/her own problems.

McDonald is very concerned to explain the intuition behind the numerous formulas presented in the text, and presents the various chapters in an expertly-designed sequence so that new results nearly always become understandable as more general ways of seeing results presented in earlier chapters. The material progresses gradually from basic to complex, so that the dedicated reader becomes thoroughly acquainted with results that have only recently been discovered. As a consequence, this textbook becomes a handy reference work to be kept at one's desk for daily use.

I came across this book more or less by accident, and as I was browsing through it I noted with particular interest several substantial discussions of how derivative pricing can be done with real probabilities so as to arrive at the same results as pricing done with the pseudo-probabilities (or risk-neutral probabilities) discussed in most texts. These sections provided an extremely important clarification of an issue that undoubtedly occurs to nearly all students of derivative pricing but is nonetheless ignored in nearly all of the relevant textbooks and literature. I knew right then that the author understood what questions were occurring in the minds of his students and how to deal with them.

This book is a bit more expensive than some rival texts, but it is entirely worth it because of its tremendous clarity and because of the software that accompanies it. In reality, this book is a bargain.

I had the privilege of using the manuscript of this book for two advanced finance courses I did at Kellogg School of Management (Northwestern University---the Author's home) and just got a chance to read the final published book. This is an excellent book on derivatives markets which should appeal to three types of readers: 1) MBA students doing their first finance course on derivatives; 2) Non-finance professionals who can easily grasp quantitative aspects of derivatives pricing schemes but lack an an intuitive understanding of why, where and how derivatives are used (I was in this category until I attended Kellogg); and, 3) Corporate finance professionals trying to understand different risk management tools. Bob McDonald did a great job in maintaining a good balance between mathematics of derivatives pricing schemes and logical explanations of several economic concepts one would encounter in derivatives. This book is going to be a popular MBA text book very soon.

In the first four chapters of the book, the author assumes that the prices of different derivative securities are known and discusses how these securities can be used for insurance and speculation (Chapter 4 has a nice introduction to risk management). Chapters 5-8 explain pricing methods for futures, forwards and swaps using simple discounting models. Chapter 6 has a lucid discussion on how would "futures contract price vs. time" curves for different commodities differ based on the seasonality, transportation costs and storability aspects specific to each commodity.

Starting in Chapter 9, the author discusses different option pricing models. The material presented in Chapters 10-13, where in the author discusses binomial option pricing models, Black-Scholes formula and delta hedging, is clearly the highlight of this book. I did not find such a crystal clear discussion of binomial pricing models and the rationale behind delta hedging in any other text book. In Chapters 15-17, the author discusses financial engineering (how to create a required payoff from basic building blocks) and corporate applications of derivatives (including real options). In the remaining chapters (Chapters 18-24), I would recommend Chapters 18, 19 and 24 to all the readers. The other chapters are not really necessary unless you plan to work on developing derivatives pricing schemes.

In summary, I strongly recommend this book to every serious student of finance.

The cover and page quality make this book a joy to read compared to other derivatives texts on the market.

Even more important, Dr. McDonald's writing is clear and logical. His theory is current and well laid-out. Compared to Hull it has more PDE's and sound theory. Compared to still other derivatives texts, Dr. McDonald gives more applications to supplement the theory.

If I could only recommend one derivatives texts to students and practitioners needing a thorough overview of the market, this would be the one.

I was recommended this text book by the study material I was using to prepare the acturial exam FM. Then I came to check this book here and I found out that the price here is way too much higher. With this price, you can buy both the text book and its solution mannual in Actex Mad River with free UPS shipping. Hope this will help.

I have used this book as text for my final year undergraduates majoring in Finance and the response is great ! The students love it as the writing is clear and most chapters provide enough working examples for independent learning. The mathematical portions in this text are very crucial for understanding derivatives and this is where i think the author scores highly, given his background from MIT !

The later chapters (Chapter 15 onwards) in Part 4 and 5 are more advanced and more suitable for postgraduate studies, which i would love to explore more but unfortunately did not have much time to explore as an undergraduate lecturer.

This seems to be the book chosen by most instructors so there must be some reason for assigning it. I am familiar with the material from reading corporate finance texts. This text, however, is not written well and is actually confusing. So one struggles to understand what the author is actually saying. Hope it gets better.

This book is actually quite weak. While, the other books recommended by Actuarial Societies are quite strong, this one does not hold up. There are not enough examples or problems in the book. In addition, the book continually reuses the same information in its examples requiring less thought to get through them.
My biggest complaint is how the book approaches Put-Call Parity. This book offers the worst explanation for that concept I have ever read, which is sad because it is the basis for pricing calls and puts.

For those studying for the Actuary Exam MFE, this is a decent textbook to refer back to. I am also using Weishaus's Exam MFE study manual. It's nice to read the textbook and get the background for what is basically just included as Cliff's notes in Weishaus's study manual. The two paired together provides a comprehensive background for the material.

The first part of the book is written for use by basic undergraduate finance courses and avoids calculus and most of the mathematics for that matter. This is presumably to sell more copies. The material is so completely watered down in this section that it is a complete waste of time. For example by the time you make your own notation for forward prices / call and put premiums and spend time deriving results that are right under the surface, it finally presents the material by chapter 5, only to hold off on the rest of the results on the same material until later chapters!

By the later sections of the book, I was still optimistic only to be let down again. The rest of the book continues in the same maddening fashion, giving small glimpses of what is actually going on but quitting short of developing the theory to a level which results in a solid understanding. This kind of "gentle" treatment of a naturally advanced subject makes the material seem much more murky and renders it less accessible. That's not to say that a book on this subject needs to have PHD level analysis as a prerequisite, but after suffering through this book, I'm convinced a fairly rigorous approach is necessary to enable a decent grasp of the material.

The topic of this book is fascinating, complete with fractals and simulation and money and the like, but the frustration it causes by dancing around the material and not giving it to you up front makes for a unsatisfying experience.

If you are required to study this book, I strongly recommend reading the later sections and then coming back to the fill in some of the details. It might save a couple grey hairs.

It has important facts that I needed to learn for the Actuary Exam FM.
Unfortunately, I find textbooks to be tedious, and it does not provide the answers to the questions at the end of the chapters.