Principles of Financial Engineering (Academic Press Advanced Finance) [Hardcover]

Salih N. Neftci (Author)

Book Description

ISBN-10: 0125153945 | ISBN-13: 978-0125153942 | Publication Date: May 3, 2004 | Edition: 1

Bestselling author Salih Neftci presents a fresh, original, informative, and up-to-date introduction to financial engineering. The book offers clear links between intuition and underlying mathematics and an outstanding mixture of market insights and mathematical materials. Also included are end-of-chapter exercises and case studies.

In a market characterized by the existence of large pools of liquid funds willing to go anywhere, anytime in search of a few points of advantage, there are new risks. Lacking experience with these new risks, firms, governmental entities, and other investors have been surprised by unexpected and often disastrous financial losses. Managers and analysts seeking to employ these new instruments and strategies to make pricing, hedging, trading, and portfolio management decisions require a mature understanding of theoretical finance and sophisticated mathematical and computer modeling skills.

Important and useful because it analyzes financial assets and derivatives from the financial engineering perspective, this book offers a different approach than the existing finance literature in financial asset and derivative analysis. Seeking not to introduce financial instruments but instead to describe the methods of synthetically creating assets in static and in dynamic environments and to show how to use them, his book complements all currently available textbooks. It emphasizes developing methods that can be used in order to solve risk management, taxation, regulation, and above all, pricing problems.

This perspective forms the basis of practical risk management. It will be useful for anyone learning about practical elements of financial engineering.

* Exercises and case studies at end of each chapter and on-line Solutions Manual provided
* Explains issues involved in day-to-day life of traders, using language other than mathematics
* Careful and concise analysis of the LIBOR market model and of volatility engineering problems

Editorial Reviews

Review

"This is the first comprehensive hands-on introduction to financial engineering. Neftci is enjoyable to read, and finds a natural balance between theory and practice."
- Darrell Duffie, James I. Miller Professor of Finance, The Graduate School of Business, Stanford University

"Neftci's book captures much of the excitement of the recent surge of theoretical and practical work on financial engineering. A variety of readers will be interested in this book, including lay people who are interested in better understanding how financial markets can be used to share and mitigate risks and practicioners who are interested in constructing and valuing new securities."
- Thomas Sargent, Professor of Economics at NYU, and a Senior Fellow at the Hoover Institution, Stanford University

"...an excellent book on which to base an initial course in a financial engineering or mathematics program . . . . [It] has a breadth and consistency that make it an excellent introduction to what practitioners need to know."
- Financial Analysts Journal

Book Description

Best-selling finance author presents a fresh introduction to financial engineering

See all Editorial Reviews

Product Details

• Hardcover: 556 pages
• Publisher: Academic Press; 1 edition (May 3, 2004)
• Language: English
• ISBN-10: 0125153945
• ISBN-13: 978-0125153942
• Product Dimensions: 10.3 x 7.5 x 1.5 inches
• Shipping Weight: 3.2 pounds
• Average Customer Review: 4.9 out of 5 stars  See all reviews (14 customer reviews)
• Amazon Best Sellers Rank: #1,132,883 in Books (See Top 100 in Books)

Customer Reviews

Most Helpful Customer Reviews

84 of 94 people found the following review helpful:

5.0 out of 5 stars A triumph of clarity with a welcome balance of techne & arte, August 27, 2004

By 

Bachelier ""1004"" (Ile de France) - See all my reviews

Amazon Verified Purchase

This review is from: Principles of Financial Engineering (Academic Press Advanced Finance) (Hardcover)

In a word: Salih N. Neftci's `Principles of Financial Engineering' is a triumph. Neftci's `Principles' joins Mason and Merton's "Cases in Financial Engineering" as the field's premier fundamental texts, most especially for students, but of practical use for practitioners as well. Neftci's chief strength in this work is the same that has made his "An Introduction to the Mathematics of Financial Derivatives" deservedly famous: clarity. Where other authors get bogged down in dark obscurantism, such as Beaumont's unsatisfying and inadequate "Financial Engineering Principles," or Galitz's risk management book, inappropriately titled "Financial Engineering: Tools and Techniques to Manage Financial Risk," Neftci sheds clear sunlight on the field of constructing structured products with the building blocks of financial instruments. He is the most gifted writer in practical financial mathematics, and his legions of fans are not wrong: there is no one better than Neftci at breaking down complex concepts in clear, digestible bites and then reassembling the whole. Neftci's `Principles' improves upon, and indeed replaces, Cuthbertson and Nitzsche's "Financial Engineering: Derivatives and Risk Management" for applicability and lucidity, and replaces Mashall's "Financial Engineering: A Complete Guide to Financial Innovation" in scope. But Neftci does not sacrifice addressing difficult or complex structures through useless over simplicity, as sadly is the case with Eales's "Financial Engineering," rather he builds his explanations smoothly and logically, shedding light on the topics at hand by continually clearly demonstrating a replicating portfolio that mimics the instrument using other asset classes. For example, he begins by addressing the construction of cash flows with forward contracts, and then moves on to interest rate derivatives, swaps, repos, and then puts them all together for dynamic replication methods and the construction of synthetics. Each chapter builds and sheds light on the next instrument and technique. By the time Neftci addresses options and applications to bond convexity strategies and credit derivatives, we are in a position of strength. Most notable is Chapter 14, which clearly reviews volatility trading and discusses both the strengths and pitfalls, before turning to the nearly endless problem and opportunities of volatility smiles. He does not turn away from the problem of pricing in the presence of smiles, and uses the example of trading in the FX markets to shed light on strategies. For those working on synthetic and structured products desks, this will be the premier text. For those working on credit derivatives and other derivatives desks, this work assists in clarifying basic financial engineering concepts that then are more appropriately addressed in specialized texts, Schönbucher's "Credit Derivatives Pricing Models," for example. For those seeking a more rigorous mathematical foundation to financial engineering, Capinski & Zastawniak's "Mathematics for Finance: An Introduction to Financial Engineering" or the works of Steven Shreve and Ioannis Karatzas are the volumes to turn to. But for a solid work for a student who wishes to be a practitioner, Neftci is always the first choice. For the instructor, this book, coupled with the above-mentioned `Cases' will provide the exact balance between techne and arte that provides students with the best education for engineering structured products. There is a single caveat to my otherwise wholehearted praise for this book: those already deeply familiar with these topics will find little new here: this is not a groundbreaking work announcing new techniques or research. Rather, the strength of Neftci's `Principles' again is clarity clarity clarity. This is a most welcome volume, the one I wish I had had as a graduate student, which leaves this reviewer envious of those who will benefit and have stronger careers due to its current availability. We owe Neftci our thanks.

35 of 37 people found the following review helpful:

5.0 out of 5 stars I can't praise this book too highly!, December 8, 2005

By 

Nicholas Warren (New York, NY USA) - See all my reviews
(REAL NAME)   

Amazon Verified Purchase

This review is from: Principles of Financial Engineering (Academic Press Advanced Finance) (Hardcover)

As someone who teaches derivatives to practitioners and in a Masters program, I can't praise this book too highly. It is clear, comprehensive and, most importantly, concentrates on practical applications. I was particularly pleased with the chapter on repo, which is usually underestimated in importance, without requiring a whole, specialist book.

For someone with a fundamental, but non-quantitative background in financial markets (MBA or CFA level), this is the ideal place to go next before more specialised and quantitative books. The advantage of having studied this book first will be to have a clear picture of the forest for the trees.

My only (small) criticism is that the book would have been even better if it had included a chapter (or two) on the multi-tranche asset backed security structure followed by cash and then synthetic CDOs. I do hope that might be rectified in the next edition.

Bravo!

19 of 22 people found the following review helpful:

5.0 out of 5 stars An excellent reference for professionnals and students, May 18, 2004

By A Customer

This review is from: Principles of Financial Engineering (Academic Press Advanced Finance) (Hardcover)

Principles Of Financial Engineering came as an excellent surprise to me, it will probably make a lot of people feel more intelligent about themselves as it explains fairly complex technicalities in a comprehensible way. Neftci book is a very good reference for market professionals like myself in need of a rapid answer, or anyone with a desire to understand more about fixed income and derivatives. Graphical illustrations enhance the text and should make it particularly easy for finance students to understand subjects like synthetic alterations using various financial instruments.