Customer Reviews

Financial Derivatives: Pricing, Applications, and Mathematics

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One of the author, Baz, gave me a copy of this book when it came out and it went to sleep in my library as I was not in a finance mood. I forgot about it until this week as I was stuck on a problem related to risk-neutral pricing and the Girsanov theorem concerning changes in probability measure. I looked at every passage on the the subject until I hit on it. Then I realized that I should have read it before: it is a condensed, but extremely deep , and complete exposition of the subject of theoretical finance.

No financial book has the clarity of this text.

Other quant books do not have such notions as "pricing kernel" and economic theoretical matters. I would recommend it as a necessary piece of the "quant" toolkit. Every quant should have it as a background tool as the usual quant literature is standalone and devoid of these concepts.

This book draws on the PhD course that Prof. Chacko teaches at Harvard Business School and the substantial real-world experience with derivatives of both authors to offer a solid package that is useful for both theory and practice. There are other books with clear and rigorous mathematics (e.g. Wilmott), variety of methodologies for pricing (e.g. Neftci) and guides to practical hedging (e.g. Taleb), but this one presents all three components and is therefore a must-have for any serious derivatives shop. Highly recommended.

Financial derivatives are the products traded by the financial industry, banks and trading companies; a contract whose payoff depends on the behavior of a benchmark; financial instruments whose value is derived from a number of underlying variables.

Examples: futures, options, and swaps ; or other tradable assets, e.g., stocks or commodities; or such non-tradable items such as the temperature (weather derivatives), the unemployment rate, or any kind of (economic) index.

Since the industry has undergone a recent explosive growth, so have the number of variety of books covering the subject.

The book by Baz & Chacko is useful for readers wanting a mathematical introduction.

Covered are mathematical tools, financial valuation, financial models, asset pricing, Black-Scholes.

On the math side: Ito's lemma, and a systematic presentation of stochastic differential equations; and dynamical programming.

There are other similar books are out there, roughly the same level, and roughly the same emphasis; for example by Willmott-Howison-Dewynne, and by Capinski-Zastawniak.

I believe they all serve a very useful purpose. Review by Palle Jorgensen, July 2011.