Derivatives Markets [Hardcover]

Robert L. McDonald (Author)

Book Description

Publication Date: September 6, 2002 | ISBN-10: 0201729601 | ISBN-13: 978-0201729603

This text for the derivatives course is suitable for advanced undergraduate courses and both introductory and advanced derivatives courses at the MBA level. The author takes a more intuitive approach than in many derivatives books: a narrative ties the topics together, and the economics of markets and pricing are emphasized, making this book more accessible to a broad range of students.

Editorial Reviews

From the Back Cover

Derivatives Markets ROBERT L. MCDONALD

Northwestern University

Derivatives tools and concepts permeate modern finance. An authoritative treatment from a recognized expert, Derivatives Markets presents the sometimes challenging world of futures, options, and other derivatives in an accessible, cohesive, and intuitive manner. Some features of the book include:

• Insights into pricing models. Formulas are motivated and explained intuitively. Links between the various derivative instruments are highlighted. Students learn how derivatives markets work, with an emphasis on the role of competitive market-makers in determining prices.
• A tiered approach to mathematics. Most of the book assumes only basic mathematics, such as solving two equations in two unknowns. The last quarter of the book uses calculus, and provides an introduction to the concepts and pricing techniques that are widely used in derivatives today.
• An applied emphasis. Chapters on corporate applications, financial engineering, and real options illustrate the broad applicability of the tools and models developed in the book. A rich array of examples bolsters the theory.
• A computation-friendly approach. The option pricing functions used in the text are available in accompanying Excel spreadsheets. Visual Basic code for the pricing functions is included, and can be modified for your own use.

ADVANCE PRAISE FROM THE MARKET

“Derivatives Markets provides a comprehensive yet in-depth treatment of the theory, institutions, and applications of derivatives. McDonald is a master teacher and researcher in the field and makes the reading effortless and exciting with his intuitive writing style and the liberal use of numerical examples and cases sprinkled throughout...(It) is a terrific book, and I highly recommend it.”

—Geroge Constantinides University of Chicago

“...the most appealing part of the writing is how replete the text is with intuition and how effortless it is woven throughout.”

—Ken Kavajecz University of Pennsylvania

“...a wonderful blend of the economics and mathematics of derivatives pricing. After reading the book, the student will have not only an understanding of derivatives pricing models but also of derivatives markets...The technical development...brings the student/reader remarkably close to state of the art with carefully chosen and developed mathematical machinery.”

—Mark Cassano University of Calgary

Product Details

• Hardcover: 832 pages
• Publisher: Addison Wesley (September 6, 2002)
• Language: English
• ISBN-10: 0201729601
• ISBN-13: 978-0201729603
• Product Dimensions: 9.5 x 7.5 x 1.3 inches
• Shipping Weight: 3.4 pounds
• Average Customer Review: 5.0 out of 5 stars  See all reviews (6 customer reviews)
• Amazon Best Sellers Rank: #914,842 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

25 of 29 people found the following review helpful

5.0 out of 5 stars A brilliant book by a master teacher August 18, 2003

By A Customer

Format:Hardcover

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.

24 of 29 people found the following review helpful

5.0 out of 5 stars Excellent Book on Derivatives Markets October 7, 2002

By Dr. Ravi O.S. Prasad

Format:Hardcover

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.

4 of 4 people found the following review helpful

5.0 out of 5 stars Excellent for final year undergraduate or postgrads October 15, 2004

By Lim Eng Hwa

Format:Hardcover

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.