Most Helpful Customer Reviews
|
|
116 of 123 people found the following review helpful:
4.0 out of 5 stars
A good first step into the world of Quantitative Finance, May 6, 2005
The author has written a nice, lively elementary text on mathematical finance. This book can serve as a excellent launching point into the topic. For the next step in the reader's development, I recommend the very good intermediate level treatment by Bjork in Arbitrage Theory in Continuous Time. As a capstone for advanced study, I recommend the advanced treatment of Musiela and Rutkowski's Martingale Methods in Financial Modelling.
Hull starts out with several chapters on the basics of the derivative contracts in his study. The contracts introduced are forward and futures contracts, interest rate swaps, and equity options. The basic definitions of each contingency contract is given, as well as characteristics of the markets where these contracts trade. Some basic trading strategies are also studied.
The study of the option pricing model problem begins in earnest in Chapter 10. The section on one-step binomial tree model leads to a very intuitive description of risk-neutral valuation.
Chapter 11 introduces continuous time stochastic processes in a very intuitive setting. To avoid the hard-core Ito calculus, the author motivates the stochastic differential by considering difference equations. This is a nice technique and makes the material accessible to the beginner. The next highlight is a statement of Ito's lemma. This is not given in full generality, but only stated precisely as needed for Black-Scholes calculations. The appendix gives an intuitive motivation for Ito's lemma based on the multi-dimensional Taylor's formula.
This is a nice illustration as Taylor's formula is indeed a component of the formal semi-martingale based proof of Ito's rule. See for example Oksendal Stochastic Differential Equations: An Introduction with Applications Chapter 4, Karatzas & Shreve Brownian Motion and Stochastic Calculus Chapter 3, or Rogers and Williams Diffusions, Markov Processes and Martingales: Volume 2, Itô Calculus.
Chapter 12 is devoted to the Black-Scholes-Merton theory of option pricing. The famous Black-Scholes PDE is derived via Ito's rule and application of a delta hedge. The author doesn't directly solve this PDE (via the standard application of the Feyman-Kac formula). Instead a nice proof of the option pricing formula is established in the appendix based on a simple log-normal distribution argument.
Chapter 13 discusses option pricing in for other contingency contracts. In Chapter 14, we return to equity options by studying the Greek letters. The reader discovers the Greek letters can be thought of as coefficients of the Black-Scholes PDE and learns some elementary hedging techniques.
Chapter 15 discusses implied volatility and volatility smiles. It is here that the astute reader gets his first indication that the Black-Scholes theory for option pricing may not be as robust or "true to market" as the reader may have been lead to believe. (The folks at Long-Term Capital Management learned this hard lesson rather publicly.)
A survey of topics of interest follows in the next handful of chapters. The material on value at risk, the GARCH volatility model and exotic options is somewhat superficial. The careless reader will come away feeling he knows quite a bit more than he really does.
Martingale theory is touched on in 21 and the Girsanov Theorem is alluded to, but these topics are really too complex and require too many prerequisites for proper treatment in the context. A general multi-variate version of Ito's Rule is stated in the appendix of this chapter.
The next section of the book deals with term-structure models and their applications. One-factor models are discussed along with the various limitations of each of these models. This gives a nice historical treatment. The Heath-Jarrow-Morton and Libor Market Model k-factor term-structure frameworks are introduced. Without the supporting martingale theory, the analysis of these models presented here is very limited.
The last several chapters of the text are very survey-like and breezily touch on topics such as credit risk, credit derivatives and energy derivatives. There isn't a lot of theory in these chapters at all, but at least the reader is made aware of the existence of these kinds of contingencies.
The book wraps up with a cautionary chapter in the form of lessons learned. The unwary reader might see all of the derivative-related train wrecks and say to himself "well, that won't be me". The problem is that it really might be you if you truly (and foolishly) still believe the equity prices always follow geometric Brownian motion. See Lo & MacKinlay A Non-Random Walk Down Wall Street for an excellent exposition into the limitations of the basic assumptions underpinning the Black-Scholes-Merton theory.
If nothing else, Hull's last chapter should convince you that maybe this isn't the only book you'll ever want to read in your study of mathematical finance.
Help other customers find the most helpful reviews
Was this review helpful to you?
 
|
|
|
|
|
|
131 of 153 people found the following review helpful:
5.0 out of 5 stars
This is by far the best book on the subject., September 20, 1996
By A Customer
I have read most of the books on derivatives and mathematical finance. I have also read
the most important papers on the subject, and no book covers the subject so extensively
and so carefully. The difficult math is explained by Hull in a brilliantly intuitive way,
without sacrificing the mathematical rigor. He explains succinctly and accurately the heart of the
most advanced papers in the subject, in unpretentious terms, and always with the reader in mind
(unlike most of the other academics' attempt at writing a book.)
Having studied the subject in depth, from a practical and a theoretical point of view, I can say, without reservation,
that (up to 1996) this book is all you need to learn about the subject.
In fact, I dare say that if you read the book cover to cover you will be an expert in the subject.
I read the second version, and some of the most recent topics (like Value at Risk) are not treated in it,
but it is my understanding that the third edition includes all of these newer developments. If they are explained as
all the other subjects in the 2nd edition, then they should be the best explanations around.
Excellent book for novices in the subject, excellent reference book for experts, great mathematical education for finance people,
and great financial exposition for mathematicians.
(From a mathematical point of view, the only details missing are the mathematical foundations of risk-neutral valuation, i.e. Girsanov's theorem)
This book should be read (and more importantly CAN be read) by any financial officer, county treasurer (is Orange County listening?), trader, regulator
investor and banker. I also recomend this book to unemployed mathematicians, physicists, and engineers. The starting salary for these
quantitative disciplines goes up by $30,000 a year after reading that book.
Help other customers find the most helpful reviews
Was this review helpful to you?
|
|
|
|
|
|
25 of 28 people found the following review helpful:
5.0 out of 5 stars
The classic on derivatives., August 1, 2000
This book has been the standard text for mathematicians, physicists, and engineers retooling for Wall Street. I agree with the praise of other reviewers - especially 'a reader' on September 20, 1996. This book is still a gem. For a full PDE approach I recommend "Option Pricing: Mathematical Models and Computations" by Wilmott, Dewynne, and Howison. For a good probability theory approach, I recommend "Financial Calculus" by Baxter and Rennie. One reservation on Hull's book - it will be difficult for many readers with economic/finance/MBA backgrounds not completely fluent in calculus.
Help other customers find the most helpful reviews
Was this review helpful to you?
|
|
|
|
|
|
Most Recent Customer Reviews
|
Join Amazon Student and get FREE Two-Day Shipping for one year with Amazon Prime shipping benefits.
See all 100 books citing this book
