Customer Reviews

Derivatives Models on Models (The Wiley Finance Series)

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4 star:		(1)
3 star:		(2)
2 star:		(0)
1 star:		(1)

 

 

I recently purchased this book due to my positive impression from Haug's other excellent book on option formulas. For those who enjoy the history of ideas and would like to find out what is state of the art in options theory and options trading today, there is no better source than Haug's new book "Derivatives: Models on Models" I recommend this book for everyone - experts and neophytes alike.

"Models on Models" contains a number of verbatim interviews with most of the big names in quantitative finance. Emanuel Derman's interview stands out. In addition the book contains some out-of-place technical articles on selected quanty topics most of which have been taken from the author's previous published work. Some light-hearted work on trying to unify Special Relativity with Quantitative Finance and even some full-colour glossy Collector comics are included. This mix gives the book a personality crisis. As a result I really struggled to read through the book. It is not the book for someone who wants to get better in quant finance. Yet the book has some benefit in that the interviews helps you better understand who is behind the name. The interview concept is also not original - see How I Became a Quant: Insights from 25 of Wall Street's Elite. All in all the contents of the book gives you a "nice-to-know" feeling and not a "needed-to-know" satisfaction.

his is not my ordinary book review. These are good books that will only appeal to a small fraction of my readers, because few will have need for the knowledge. Both are written by Espen Gaarder Haug, who is kind of a character. He collects option pricing formulas the way some people collect Barbie Dolls, Beanie Babies, or Baseball Cards. He has interacted with some of the brightest minds in the field, and collaborated with a few of them. In both books the math is significant -- it would help if your calculus was sharp, and for any value some algebraic knowledge is needed.

Let's start with the more esoteric of the two books, The Complete Guide To Option Pricing Formulas. Almost every option formula is included there, together with ways of estimating volatility, certain statistical techniques, aspects of compound interest math, etc. The book is very comprehensive, and for those that need how to estimate the value of standard and non-standard options, it is a good book to keep on hand as a reference, together with the free CD-ROM containing an Excel add-in that allows you to use the formulas inside Excel. I have used them for some of the insurance companies I have worked for; the software was easy and reliable.

The second book Derivatives, Models on Models, is different. He interviews 15 significant thinkers on options and derivatives, and presents 15 papers by them. Most of them contain tough math; some I couldn't understand. The real value of the book was in the interviews, where many of the interviewees showed significant knowledge of the limitations of their models, and how derivatives were misunderstood by the public, or by their users.

There are quirky aspects to this book, including cartoons and photos that are somewhat self-aggrandizing to the author, but make the point in a humorous way. I liked both books, but only a modest fraction of my readers should have any interest here.

I picked up this book when a problem in quantitative finance appeared as a problem in reconfigurable computing. I've found that the head-on approach, in most cases, rarely works. Instead, I need to sneak up on the problem from a different direction, and that requires some knowledge of the surrounding terrain. I hoped this book would give me some of that background, and it did. It won't make anyone a quantitative analyst, but that was never my goal. A math-positive reader will come away from this text with a reasonable grasp of the basic mathematical tools of quantitative finance.

That reader will also come away covered in Haug's ego-droppings. Mixed in with the math and modeling, Haug presents a dozen or two interviews with other 'quants,' most of which most of which seem more designed to impress the reader with who Haug knows than to educate. It's just hero worship, with the amount of worship increasing as the hero more closely resembles Haug. I can't find the exact quote, but Haug asserts that the most intelligent people in the world are quants, presumably because of their similarity to him.

Well, maybe he's right. I certainly wouldn't have been smart enough to cause trillions of dollars simply to vanish, as happened in the planetary economic collapse of 2008/2009. That collapse traces directly to trading in the kinds of exotic options that Haug describes here, and to deep and pervasive flaws in the assumptions used to estimate those options' values and risks. One can scarcely imagine the hubris needed for even one trading house to pour billions of dollars into a shredder, let alone a worldwide industry of such traders. This book, quite unwittingly, goes a long way toward describing the personalities behind that collapse.

-- wiredweird

This book is a mash up of interviews and articles. There is not much here that cannot be found with Google. It seems that this is a book for the sake of a book. I expect most people who purchase this will be disappointed. Who is the audience for this? Not me. Maybe you. Proceed with caution.

I'm not a trader but I needed to know about derivatives trading so I bought 3 books: Energy Markets: Price Risk Management and Trading (Wiley Finance) and Fundamentals of Trading Energy Futures and Options. Fundamentals of Trading Energy Futures and Options was a great primer on the topic where Price Risk Management and Trading was a more comprehensive look at how to manage risk for an entire organization. This book was entirely about something else. I saw it written from the trader's perspective with all the glamor and mystique associated with trading. I think the three books complement each other and definitely if you want to be successful as a trader, I recommend you not only read but "study" this book. It will probably do you well and if you're looking at hiring traders, study this book as well. There are a wealth of lessons to be learned here. If you're looking for enlightenment, read this book between the lines -- its where the wealth truly lies.

This review may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements as to future operating results and plans that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Book to differ materially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason. Buy at your own risk.

Note: To avoid negative feedback, I only give 5 star reviews because I don't review books which do not rate 5 stars. It takes a really bad book for me to take the time to write a 1 star rating.

Haug was right about one thing, trading in options is a possible way to get rich. Buying books on options is a certain way to become bankrupt. I imagine writing books on Derivatives and formulas is a nice way to buy a vacation home in the French Riviera, a Porsche, or shiny stones for a girlfriend. Still, I'm smarter for having read this -- thanks Haug.