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Essays in Derivatives: Risk-Transfer Tools and Topics Made Easy (Wiley Finance)

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This is an updated version of the 1998 edition, again with the intent of making reading about derivatives easy. Seventy-three essays, grouped into seven sections are used to cover the topic.

Payoff of a derivative is "derived" from something else, at the end of a defined period. Risks involving foreign exchange rates, raw material prices, interest rates, etc. are covered.

Derivatives are instruments that permit the transfer of risk. They're not the only means - eg. a put option protects against downside risk also. Derivatives require much less capital than spot markets, and usually are more liquid and sensitive to price influences. They are also much easier to sell short. Derivatives can also be used to alter the risk of a portfolio without disrupting it.

Futures markets involve standard term contracts (except the price), with margin requirements, and exchanges guaranteeing settlement. (Forward markets are non-standardized and not guaranteed.)

Swaps are the most popular derivative. The most common type of swap is the interest rate swap - usually one set of payments determined by a floating rate (eg. LIBOR), while the other is fixed at an agreed-on rate. Some swaps have both sets tied to floating rates.

Credit derivatives strip the credit risk off eg. a loan and trade it separately. Any product called insurance automatically falls under heavy regulation in the U.S. CDS have proven to be the most successful of all credit derivatives.

"Essays in Derivatives" goes on to cover every imaginable aspect of the topic, without relying on math. (Chance also claims that most derivatives users don't understand the math anyway.) An excellent repository of knowledge on the topic!

This is the most enjoyable and productive book on derivatives, of course if you love the subject. It is no doubt that the subject is very complicated, especially if you lack college-level math-skill. This might be the best approach, particularly for end-users of various kind of risk management tools and products. Still, for more advanced individuals, this concept oriented collections of well threaded essays could be used as the mirror to check your radical understandings on the subject. I bet you will find many of your long held fundamentals be challenged or even revised thus facilitating your potential advancement on fully utilizing this prevalent indespensable risk management tools.

In shorts, it is ideal to be your second readings after your favorite basic finance texts and the great companion to any derivatives related text at whatever levels you plan to invest your (generally, lots of) valuable time in. You will experience a much steeper and higher learning curve and probably the most productive one. Derivatives will never be made this easy to study, Dr Chance has done the excellent job and thus contribution to the wide community of derivative-related learners.