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65 of 66 people found the following review helpful
5.0 out of 5 stars Required reading for finance majors
This is not another journalist musing on the financial world. This is not an academic explanation of how financial instruments work. It's something else entirely -- a rare inside glimpse into the world of derivatives by a literate professional who's been a handshake away (or closer) from the major events in the market. Das leavens a series of technical discussions about...
Published on November 17, 2006 by Amazon Customer

29 of 31 people found the following review helpful
3.0 out of 5 stars Good parts, poor parts
This book is really two, rather disimmilar, halves. I suspect that the kind of audience that would enjoy each half would be different too.

First, it is worth noting that Das is very knowledgeable about derivatives, not only in a marketing, but also a technical sense. He has written a series of (very lengthy and very good) books over the years on most aspects...
Published on June 14, 2009 by Nicholas Warren

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3 of 3 people found the following review helpful
4.0 out of 5 stars Well-written but slow, August 31, 2010
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This review is from: Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) (Paperback)
This book is definitely a slow-starter. I used to be an equity trader/analyst and find derivatives fascinating. However the way this book begins made me set it on the shelf for the time being. I will eventually go back because it does contain useful information. However for a book named 'Traders Guns and Money' don't expect the book to bring about the same excitement as the title.

That being said, this is an excellent resource on insight into the derivatives market and how it's been used by professionals and non alike. Well worth the read if you're looking to learn.

As far as other books go, "Pit Bull" by Schwartz and "Reminiscences of a Stock Operator" are two solid ones.
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2 of 2 people found the following review helpful
5.0 out of 5 stars The mysterious trading floor - angle or demon?, March 11, 2013
This review is from: Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) (Paperback)
The trading floor is always viewed as drastic battlefield in the business world. Traders have incredible highly salary; the trading business involves much of rocket science; the small change in numbers in the digital screen can be decisive for a giant company which managed billions of wealth... all of these make trading is both attractive and terrifying. But is trading is an angle or demon for society? Everyone has his own answers. In the book " Traders, Guns and Money", the author based on his own experiences in the financial industry, gave us an overview in the trading business and showed the big events in the finance history.

This book is well organized and very entertaining to read. Every chapter has its own clear subject, started with the basic introduction and then went deeper, all application followed by some real life case or big events, and thus make reader easy to understand the theory stated in the book - even for newbies. The cases in the book are so vivid and some case is very interesting. I still remember the example author used to show cultural difference: a Japanese company asked the consulting company gave them a 10,000 years business strategy plan because they thought the 3 years plan they asked before looks like one month! I like the quote the author used to describe financial derivatives: "As we know, these are known knows. There are things we know we know. We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know." In fact, the author used this quote as a link to connect all the chapters.

The book started with a furious argument between two parties - one is a firm who seek hedging strategy to their advisors - an investment bank; another is the investment bank help who help the firm do the hedge. The firm's management believed the investment bank made them signed a delusive swap contract which caused them huge losses; on the other hand, the investment bank was insisted on making the firm pay for mistakes. In the following chapters, the author described the history of development of derivatives and then turned into described the construction and hierarchy in the trading business. He presented us how the sell side and buy side lies to their clients to make money and also how they suffered from the lies they believed. Then the author started to talk about the salesperson and traders' crazy lifestyle and ugly way to doing business in the real world. In the chapter 5, the author criticized risk management business - he showed how the risk management is a game where form has long replaced substance and how the overconfidence on quantitative models caused many disasters. In the next chapter, he mainly talked about the development, application and criticizes of financial engineering. After that, author use two chapters to present the wild games in structured products and equity derivatives - how both the bond market and equity market became insane with the use of derivatives. In chapter 9, he talks about the major part of modern trading business - credit derivatives, like CDS and CDO. at end of the book, the author went back to the prologue's case: It turns out that the OCM wins and the investment bank compromised with OCM in order to avoid regulators' punishment and protect their reputation. The real word keeps moving forward: hedge funds became prevailing players; new markets for hedging, making and losing money are emerging, new WMDs were invented every day. The lies- beautiful and true were still the currency of trading.

In my opinion, the book is definitely worth to read, for whoever have some basic understanding in finance and want to gain a little deeper knowledge in the financial market. The author systematically and understandably presents all major aspects in trading business, with many vivid and real life examples. Besides the basic economic intuitions and explanations, the book also contains some detailed mathematics and quantitative skills explained in the derivatives' examples for the people who interested in digging into mathematical logic behind the financial products. As a finance major student, I learned a lot in how the structured products were designed and why the disasters happened even the top-notch financial economists and experienced traders cannot avoid, just like the famous LTCM's case. Moreover, this book develops from sell-side to buy side, from risk management to derivative algorithms, from fixed income to equities then to credit derivatives, from traders to funds, the author, based on his very own experiences, gives the readers all kinds of functionality of job at finance industry. It is extremely helpful for whom still in the early stage of the their career or who want to enter into finance industry. It provides a hole to peek how the people works daily on the global business. This book is really both interesting and informative.

However, I still believe the author's criticize on derivative innovations and financial engineering skills are too extreme. Despite lots of damage caused, I think the financial innovations still are good thing for us. We should not demonize the derivatives and trading business, which both enhanced and destroy the overall economy growth in the past. Financial instruments are both necessary and effective way to help us relocated capital and gain people's wealth - of course, if and only if they were used in a rational and controllable way. I also believe risk management is still a useful way to quantify and control risk.

As a financial engineer, we should always remind ourselves --- the capital market is made of human beings, not the data analysis and programming. When encounter a problem or try to forecast the market, we must put emphasis on the market intuition and behavior finance. People always say that data is the most trust-worthy, but in this area, data also lies. When market becomes crazy and over speculated, the correct model would warn us; when the model is unpractical and wrong, the market would also give us the sign. That's why the quant should think like both a programmer and a trader. We have to distinguish which is the valuable information, wherever it comes from, computer or market.
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2 of 2 people found the following review helpful
4.0 out of 5 stars A candid view of the finance industry, December 18, 2010
Jordan Bell (Toronto, Canada) - See all my reviews
This review is from: Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) (Paperback)
This book is a good complement to textbooks on finance. The book is mostly a candid depiction of what people in the finance industry do, the actual behavior of the business. This book talks about the actual relations between dealers and investors, and why various financial derivatives are invented and used. There are a few reasons why investors want to use these derivatives instead of directly buying a stock or bond. (Here investor means professionals who are paid and get bonuses to manage other people's money.) Dealers like these products because they give higher commissions, both because they involve doing more trades than standard products and because new products that are not well-understood have higher margins than products that everyone is selling. If I am selling call options on gold in a year than it is simple to compare what I am charging to what other people charge, whereas if I am selling a complicated structured investment product then there may be nothing to which it can be directly compared. The reasons that Das describes for investors to buy these various derivatives are the following. First, they want an investment that maximizes their bonus. Das gives the example of Japanese life insurers who can only get bonuses from income on investments rather than capital gains. Thus they would rather make an investment that has low capital gains but high income (p. 221). Second, investors want to buy things that the rules of their institution do not allow them to buy, for example by swaps. Third, investors want investments that minimize the amount of tax they have to pay for a given return. Fourth, they want leverage.

Also, there are problems of conflict of interest. An investor who is investing other people's money wants to get perks from dealers like tickets to tennis games, and prostitutes (see pp. 119-120). Since they are investing the money of other people, they go with an investment through which they get better perks instead of an investment that could be objectively better.

A lot of the book is about accounting and reading it made me see that accounting is not as simple minded as I had imagined it to be. It is simple to account for money that I earn today and have in my pocket, but there is not an obvious answer about how to account for money that I will probably be getting in the future.

Das makes the point that financial research that companies make public is just an advertisement, otherwise it would be kept proprietary (pp. 62-63).

What seems to me the main problem Das shows in the financial industry is that a trader who is using the money of someone else gets large bonuses when they make money but at worst loses their job when they lose money (see p. 150). This leads to the question of how much traders deserve of what they win by trading. It is easy to attach a money value to what a trader does, unlike people who work in supporting roles in finance like quants and people in the back office. "The key to the high level of compensation is attribution: the ability to relate individual efforts to earnings is unparalleled. A surgeon might save a life, but what is the value of that life? The ability to measure the money made allows a few traders to earn amounts that are incomprehensible." (p. 148) Just because one works with enormous sums of money does not immediately imply that one deserves a share of it; perhaps most reasonably skilled people doing the job would make the company just as much money. The seat the employee is occupying may have the real value, rather than the employee themself. "Nero restaffed the sales desk with junior employees and there was no discernible change in revenue." (p. 125) The clients just had to be reassured that by working with a junior employee they would still get invited to tennis games.

I like this book but I feel it is too long. Its main point seems to be that people in the financial industry maximize their bonuses and perks and that this drives a lot of the development and use of financial products. I feel that this point was made well enough in the first six chapters of the book. In and of themselves they make the book well worth reading.
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2 of 2 people found the following review helpful
5.0 out of 5 stars A must for anyone with money that you may know what the teller in your local bank is selling you, July 1, 2008
I had very high expectation of it because of Frank Partnoy's praise in the back cover. Partnoy's Fiasco "was" the most interesting read of this topic, about how derivatives traders and salesmen reap the face off their customers. I love it so much that I search on Google in order to have a look of the Indian author and to know him more, which I found on the Publisher's site an interview with the author and his photo. Below please find some shortcut for your reference. Hope you like them.

"It's not a technical book. It is part thriller, part expose. It a fun read but it teaches you something about the business. It will show how these markets work. It's also satiric, irreverent and black in its humour...It is a collection of lots of stories. Here's a few:

Story 2

Around 1999, I met an ERM (Enterprise Risk Management) advocate,. Dudley , the head of risk for an investment bank. He wanted to meet me. I had no idea why. I soon discovered that Dudley had reached ERM. It was the "new", best-est thing. It was revolutionary. Dudley was at the forefront. He would give me an example of the problems he was trying to model.

"Let's say our head trader has a complex trading strategy only he understands, yes". I nodded. I didn't think any strategy could be that complex, at least if a trader had put it on. But it was quite likely that no one knew about it. The trader may have not told anyone. "Let's say the trader bicycles to work". I did not think this likely. Traders prefer Porsches. Not wishing to prolong the discussion, I did not disagree.

"On the way to work, he is hit by a bus. His mobile phone is knocked away from him and damaged. He is unconscious. Assume that simultaneously market prices move due to surprise news. This news is vital to the trader's position. He does not know. Nobody knows what to do with his position". I nodded. "That's not all. Assume simultaneously, there is fraud in another bank". I nodded in real agreement. That was very likely. "This bank goes into bankruptcy. It creates a financial crisis. This of course affects the trader's position. He doesn't know of course. He's unconscious". I was hoping he would get to the point soon.

"At the same time, assume there is an accident at a power plant. There is a blackout. The bank's back-up generator fails. The mechanic forgot to check the fuel tank. The bank's computer system goes down. The trader can't get prices or model the risk on his position". I reminded Dudley that the trader was unconscious, maybe deceased. "Exactly", he replied cheerily. It went on.

Eventually after a tragedy of biblical proportions had been outlined, Dudley reached the end. "I am modeling the probability that such an event could occur". For me, it was one step too far in the search for "holistic risk". Risk management seemed to have completed its transformation into pure entertainment. Dudley seemed the epitome of a risk manager who would drown crossing a river that was 12 inches in depth on average.

Story 3

Nero and I marketed together a fair bit. I provided the technical bits. He smoozed the clients. Nero and I were making a pitch for a new structured product with a portfolio manager from an overseas fund over dinner. Dinner was a 3 martini, 2 bottles of French red wine and cigar and brandy affair. I kept looking for a moment to interject and explain the structure and benefits of the trade. I didn't get a chance.

Towards the end of the evening, the fund manager turned to Nero and said: "The girls are coming up to my room, right?" I looked at Nero surprised. "You didn't forget the stuff, it drives the girls wild?" Nero muttered something and carefully steered the conversation in a different direction. After dinner, Nero and I left the hotel. Nero stopped and drew his hand in a cutting motion across his throat. "Remember IBGYBG," he said. "I be gone, you be gone. Got it kid." A week later the portfolio manager was on the phone. "Been thinking about your deal. Like it a lot. Send me a term sheet. I think we can do something there." We closed a juicy trade for $200 million booking profits of over $2 million.

Years later, one of Nero's boys was pitching a deal to a client. Coincidentally, I happened to be a consultant to the customer. During the presentation, I asked some questions. Nothing personal, I was doing my job. The presentation wasn't going to plan. Eventually, the salesman stood up and said: "The product is unsuitable for you. It is intended for someone less sophisticated." I rang and told Nero. He killed himself laughing. True lies, all of them.
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2 of 2 people found the following review helpful
5.0 out of 5 stars Best insider's story on derivatives world I've ever seen!, February 1, 2009
Dmitry (Moscow, Russia) - See all my reviews
"Traders, Guns & Money" is the best insider's story on the complex, excessive and breathtaking world of derivatives I've ever seen. And I know what I'm talking about as for last 3 years I'm working as FX/MM Derivatives Sales in global banks and investment companies in Russia.
Must Read for anyone entering/considering to enter the industry of derivatives (either on sell- or buy-side).
And Don't Give It To Your Clients To Read if you're already in the industry, as one of the best parts of the book is trading floor hierarchy breakdown starting with 'Salespeople are lying to clients. Traders lie to sales and riskmanagers...' and so on. Trust me, you Don't Want your clients to read This! ;-)
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2 of 2 people found the following review helpful
4.0 out of 5 stars Fun & informative reading, April 18, 2009
As a former derivatives trader in emerging markets I can tell that Traders, Guns & Money is an accurate description of what goes on between derivatives' salespersons and companies' treasuries.

The recent events in the financial markets make this book required reading to understand how companies, banks and other entities could get in so much financial trouble.
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2 of 2 people found the following review helpful
5.0 out of 5 stars A refreshing look into derivatives from a professional, April 12, 2010
The author studied and ACTUALLY traded the derivatives that some people ONLY talk about. The book is written in an entertaining yet very informative way. I figure you would not be an expert on derivatives after reading but you sure will know a lot more about them. So in way, this is an insiders recount of the world of derivatives. A great book.
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1 of 1 people found the following review helpful
Verified Purchase(What's this?)
Sanyajit Das is a financial analyst who had written many books on derivatives and related topics, such as Extreme Money: Masters of the Universe and the Cult of Risk, Risk Management and Financial Derivatives, Credit Derivatives, Swap and Derivative Financing, etc. He has also revised this 2006 book [see: Revised edition.

He wrote in the Preface, "[This book] is the record of my time in the derivatives industry. It is a collection of tales about the products, the people and the strange goings-on in the business... There is almost no literature that explains the industry in an accessible way. There is also little that sets out the practices, some of which are insane, of this mysterious area of finance. [The book] explains the industry, how it operates and what it does. The book does not attempt to make a case for and against derivatives, it just shows what REALLY goes on every day in the dealing rooms in major financial centers, the real life dramas and rational madness that shape modern markets. [The book] is intended for two audiences. People in banking and finance ... will find it a wry and entertaining read... This book is also for those who want an accessible introduction to this weird and wonderful world. It will perhaps confirm their worst fears and prejudices about these strange instruments, what they are used for and the people who trade them." (Pg. xiii)

He recalls, "Many of today's traders hadn't been born when I stumbled accidently into derivatives trading. I had spent over 25 years in this world of traders, guns and money. The traders and money were clear enough. And you couldn't have financial weapons more powerful than derivatives---they were the big guns of the trade... How did I get there? I had followed the money... I had not known very much about derivatives when I started. How did I get here? ... This is that story. It is also coincidentally the story of the rise and rules of derivative trading---its 'knowns' and its 'unknowns.'" (Pg. 18)

He points out, "The major defender of derivatives was Alan Greenspan, Chairman of the Federal Reserve Bank of New York... The head of the central bank's role as cheerleader for the derivatives lobby was curious." (Pg. 20) He recalls, "We needed 'innovation,' we were told. We created increasingly odd products. These obscure structures allowed us to earn higher margins than the cutthroat vanilla business... New structures that clients actually wanted were not that easy to create... The truth was that we weren't very creative but by golly, we were good at plagiarism. We chased our tails some more." (Pg. 41) Later, he adds, "Survival requires keeping your head down. There was no point in resisting the latest fad. I just nodded and kept doing what I always did---trying to make money. No management fad lasted long. Before you know it, we would have a new 'business model' and would be entering a 'new paradigm.'" (Pg. 74)

He observes, "Greenspan had been right---risk had truly been unbundled. We had just packaged it right back up and shoved it down the eager throats of the wealthy taxpayers of Orange County. Warren Buffett was also right---when the tide did finally go out, as it did rapidly in 1994, we learnt that Orange County was swimming naked." (Pg. 50) Later, he notes, "Some dealers warned Orange County about the risks they were running. At the time, Robert Citron regarded himself as a genius, encouraged in this belief by the dealers who were cashing in on his brilliance... Dealers love sophisticated investors. They are easy pickings." (Pg. 127) He concludes, "Who was paying for the party? It turned out to be Orange County taxpayers." (Pg. 214)

He comments, "Traders become locked into a life that is focuses exclusively on work and making money. They dress well and live well. Their reading consists of work materials, an occasional business book... and the odd pulp fiction or spy novel at airports... They exist in an isolated world or premium class business travel, limo transfers and five-star hotels. Butlers, valets, maids, cooks, lifestyle assistants and personal trainers surround them. This becomes the reality of existence. Others perform the simple acts of living for them. They cease to be capable of doing anything for themselves." (Pg. 78) He observes, "There is a lot of activity around bonus time, very little of which has anything to do with trading... the day after the cheque clears there is frequently a glut of personnel announcements... Bonuses also drive spending. Luxury car dealers' fortunes are closely tied to the level of bonuses in banking..." (Pg. 147)

He recounts that "a mathematician, had taught at the university and, tired of seeing his students earn far more than he did, joined the migration to banking. From time to time he visited his former academic colleagues to discuss the latest research. They were derisive about his job: they were involved in interesting work. The maths he used to model derivatives was trivial, undergraduate stuff. He consoled himself with the fact that he took home, in a good year, ten times what they made. He was a POW---a prisoner of Wall Street. It was about the money." (Pg. 183-184)

The book can be somewhat disconcerting, in how it flits from one topic to another, interspersed with Das's personal recollections. Nevertheless, this is a fascinating (and somewhat prescient!) view of the derivatives and financial services industry, originally written just before the financial collapse of 2007-2009. It will be very welcome reading for anyone studying this era.
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1 of 1 people found the following review helpful
5.0 out of 5 stars Financial WMDs, March 12, 2013
This review is from: Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) (Paperback)
Traders Guns & Money was a good read. Satyajit is very thorough and candid in his delivery of the realities of the derivative markets.
I believe the book is very informative and gives you a glimpse into the reality of the sell-side and buy-side of the derivative markets. Traders Guns & Money reveals the fallacies of the market to the reader. He goes in to detail examples corporate giants whose lack of understanding of the markets cost them significant losses. If you want to know how the derivative markets really works, this books is for you. This book serves as an introductory course to derivatives. It does not go into detail about option pricing strategy and technical analysis, but it give the reader an accurate depiction of how derivative products are used. Satyajit present the opposing views that Warren Buffet and Allen Greenspan have regarding derivatives. He then explains derivatives in great detail, allowing the reader to choose a side in the debate. A great read.
Satyajit opens the book detailing the opinions of the worlds must notable financiers, Warren Buffet and Alan Greenspan. These two men have starkly different views and opinions on derivatives. Warren Buffet and his followers believe derivatives to be a financial weapon of mass destruction. Whereas, Allan Greenspan believes derivatives are the driving force of efficient markets.
Stayjit explains derivatives. Derivative is a term for forward and option contracts, which are used to protect end users against exposure to price fluctuations. Options and derivatives are quite similar. Both are used to hedge again risk of price fluctuations. The difference is that options pay premiums to the writer or seller. The premium is paid to the seller, because they assume the risk of price fluctuations. The writer of the option serves as the insurer of the buyer of the option. A forward does not have a premium. Instead, a forward is the agreed upon price of which a quantity of assets will be exchanged in the future.
Basis risk is the difference between the future contract and the underlying. Stayjit explains basis using the example of WTI and jet fuel prices. He goes on to show how buying WTI futures using leverage maximizes your gains and also exposes you to bigger losses. A baker and a farmer exchanging forward contracts on wheat is an example of how derivatives can be useful to hedge against risk. For parties who are not primary users of the underlying, derivatives serve as a way to benefit from price fluctuations. Speculators add liquidity to the derivatives markets and are accountable for 70% of trading of derivative securities.

He goes on to explain swaps in a fairly simple manner. Swaps, he explains, are basically forwards. Swaps enable the end users to exchange one series of future cash flows for a different series of future cash flows. There are several types of swaps, which are all defined by the characteristic of the exchange. An exchange of a series of cash flows that had a fixed rate for a series of cash flows that had a variable rate (floating rates) is an interest rate swap. Exchanging a series of cash flows based on interest rates for a series of cash flows based on equity price changes is an equity swap. Exchanges a series of cash flows in US dollars for a series of cash flows in yen is a currency swap.
Swaps were instrumental in the existence of OTC (Over the counter) derivative markets. Swaps enabled dealers and banks to engage in customized, tailored transactions off of the exchange. It is the lack of transparency that makes the OTC market and swaps highly profitable. All sorts of profits can be hidden from the public using derivatives, because they are off the balance sheet. Regulators use accounting standard boards such as the Federal Accounting Standards Board (FASB) and the International Accounting Standards (IAS) as anti-derivative weaponry. However, neither has been very effective at decreasing the volume of cash settled derivative trades that are off the balance sheet. Due to the fact that one can own an underlying without every taking possession of it opens the frontier for regulatory arbitrage. That is, speculators have the ability to circumvent regulatory hearsay using derivatives.
The book goes into great detail about CDOs, CDS, structured products, arbitrage, modeling, and nearly any area of investment banking.
Style and structure
The style of the book is conversational. Satyajit does a fantastic job of keeping the readers interest. You will not feel like you being lectured in a derivatives class. However, the material covered and the level of detail will be akin to taking a derivatives course. His style is also comedic. You will find yourself laughing at the bluntness of Satyajit's delivery.
Opinion on specific parts of the book
Satyajit's opinion of the derivatives market is far from the status quo. I think that his divergence from the status quo is intentional. His opinion of the buy-side and sell-side of the derivatives market is accurate, being that he worked on both sides.
The part of the book about Disney's enthusiasm about trading swaps was my favorite part, primarily because I've been familiar with for some time. Disney engaged in several hedging transaction using currency swaps in order to decrease exposure of fluctuation of USD/Yen exchange rates.
The bottom line is that Disney lost $48 billion dollars a year due to a director of finance who was not well educated on the derivative markets.
Interesting quotes
The golden rule of trading and investment banking is "if you make gold, then you make the rules."
In my opinion, this is the most powerful quote in the books. The traders who make the money make the rules. They get the promotions and get autonomy to make decisions on their own. The goes into detail about successful traders. The most successful traders make some of the worst managers. There is not requirement to being promoted aside from making a lot of money for the investment bank.
Also, majority of the traders are successful for a brief period of time. A trader may make the rules to day and be fired a week from now. This is the environment of the culture of Sales and Trading. If you do not make money for the investment bank, the you do not have a voice.
Summary of opinion/review
I believe that this book is very informative, accurate depiction of the derivative markets. It makes the reader a more sophisticated reader of financial literature. You will find that after reading the book that you approach the financial editorials and television programs with a more skeptical eye. There is a component of marketing behind financial news. This book tells you about the beautiful lies that editorials present. It also details the effects of believing in such beautiful lies. Beautiful lies are those lies that we want to believe, because they sound really good.
I use this book as a reference whenever I'm reading financial editorials. The book can serve as a guideposts for the unsophisticated buy-side end user or the student who is interested in working on the sell-side.
The book gives you the good, the bad, and the ugly. Well, the majority of the book is the ugly. You can depend on the newspapers, television shows, and investing books to glamorize the financial markets.
As a finance major, the book has had a profound impact on my view of the Sales and Trading profession.
I recommend this book for students who are interested in a career in Sales and Trading or Investment Banking. You will get a look into the lifestyle of Salespeople and Traders. You may find that you are attracted to the highly competitive atmosphere. On the other hand, working with your opposition on a daily basis may not be a great environment for you.
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1 of 1 people found the following review helpful
4.0 out of 5 stars A real world intro to the world of derivatives, March 12, 2013
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This review is from: Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) (Paperback)
Traders, Guns and Money is a fun read about the real world of derivatives. The author did a good job in that he would give you perspectives of what goes on in the financial markets. This is the book to read, if you want exposures to the financial workplace. The author went through many events that he went through during his professional career in the financial market place. He began the book with an event where he was involved with his Indonesian client dealing with derivatives. Everything the author described were to the point, crucial events in the financial markets, historical, definitions of financial terminologies, and insight in the practices of Wall Street. He talked about how the derivatives market evolved over the course of his career starting in March 1977. There are a total of nine chapters in this book. Some sections seemed a bit more like a text when he described some of the terminologies on derivatives, such as on credit default swaps, collateralized loan obligations, synthetic securitization, repackaging vehicles, and parallel loans. I noticed he uses Long Term Capital Management (LTCM) for his examples very frequently. The author talked about how derivatives became a global player in the financial workplace. This book is very informative about the world of the derivative markets. It gave me an inside look at how financial institutions dealt with one another in the real world, outside of textbook. Satyajit Das explained it practically, interestingly, and at the same time humorously. I was delighted that he mentioned financial engineering because that is the area I am studying right now. This book gave me a concise, yet a real sense of the practice of derivatives in the real world. Overall, this book helped fill in my puzzles in my understanding of the financial world, Wall Street, securities trading, and a career in derivatives.

The interesting point about the first chapter on "Financial WMDs - derivative demagoguery" was that Warren Buffet and Bill Gross were not advocates of derivatives and Alan Greenspan supported the use of derivatives. Satyajit Das was right about Warren Buffet and Bill Gross, who argued against the use of derivative products. These big shots who own large investment institutions do not wish smaller investors to deal with derivative contracts because derivatives have the potential to make large price moments that could be devastating to their portfolios.

The sell side and buy side in the finance world were described in chapters two and three. The author called them "beautiful lies" and "true lies". I supposed he was trying to depict the relationship between the buyers and the sellers of securities. Financial intermediary makes financial transactions more efficient. Without them, organizations could not obtain their funds at a lower cost, thus borrowing would be high and American corporations competitiveness would decline relative to their competitors around the world. The functions of financial intermediaries might give people the perception that they have unethical business practice, but if we continue to add more stringent regulations to the financial system and hinder they competitiveness, then at the end, American corporations will suffer from global competitions. The big picture is more important in this case.

It was interesting how the author describes the basis of how derivatives experts' thinking were formed from the concepts described in chapter four, "Show me the money - greed lost and regained". A follow up on this natural human desire for money was on the fifth chapter on, "The perfect storm - risk management by the numbers". The greed for money and derivatives was building up a vicious cycle of unintended crisis that were able to be unfold. The author wrote, "a trader who made over one million dollars at an investment bank would not speak to an auditor who was making fifty thousand dollars." Derivative contracts if used with constraint could be extremely useful in risk management. Large financial institutions that use derivatives recklessly could devastate whole economies. However, for example, an investor could use derivatives to limit the risk exposure from foreign exchange. Large financial institutions that are deemed too large to fail must be regulated. Otherwise, we could see a repeat of the dangers of large financial institutions who could bring down our financial system and economy.

The author talked about the nuts and bolts of these super mechanisms that eventually almost bought financial armageddon to all of us. He called this chapter, "Super models - derivative algorithms". Everyone was talking about financial models, even the freelancers in the "cool" bars were talking about what was once considered nerdy. Structured products created by "financial engineers" were mentioned on chapter seven, "Games without frontiers - the inverse world of structured products". Derivatives had become so profitable and mainstream that there were departments in financial institutions that specialized in doing financial modeling products. They are known as structured products. They were so complex that no one really understood them, not even a county municipality. The author on chapter eight magnified the complexity of financial products and derivatives. Literally, every major financial institutions were connect one way or another by these structured products. It was a cycle that was recycling by its own. A ball of web was snowballing into something very big. I never knew that Bankers' Trust was the first to initiate CDS until reading this book. The author depicts the daily activities of professionals in financial institutions. They must be very stress at their work.

Then came the credit default swaps and collateralized debt obligations. These were considered complex products to the exponential power. The author talked about this in chapter nine, "Credit where credit is due - fun with CDS and CDO". These products were not really fun because they almost brought down the financial system. Things were spinning out of control with these super complex products already and now financial institutions were slicing and dicing them up for profits. The author described in his book very well how the greed for money was unstoppable at the beginning until everyone wakes up when it finally avalanched on top of all the excitement that had accumulated since its inception.

All walks of life that are interested in derivatives, the financial markets, history, economics, or just a fun read should read this book.
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