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Derivatives Markets is a thorough and well-presented textbook that offers readers an introduction to derivatives instruments, with a gentle introduction to mathematical finance, and provides a working knowledge of derivatives to a wide area of market participants.
This new and accessible book provides a lucid, down-to-earth, theoretically rigorous but applied introduction to derivatives. Many insights have been discovered since the seminal work in the 1970s and the text provides a bridge to and incorporates them. It develops the skill sets needed to both understand and to intelligently use derivatives. These skill sets are developed in part by using concept checks that test the reader's understanding of the material as it is presented.
The text discusses some fairly sophisticated topics not usually discussed in introductory derivatives texts. For example, real-world electronic market trading platforms such as CME’s Globex. On the theory side, a much needed and detailed discussion of what risk-neutral valuation really means in the context of the dynamics of the hedge portfolio.
The text is a balanced, logical presentation of the major derivatives classes including forward and futures contracts in Part I, swaps in Part II, and options in Part III. The material is unified by providing a modern conceptual framework and exploiting the no-arbitrage relationships between the different derivatives classes.
Some of the elements explained in detail in the text are:
- Hedging, Basis Risk, Spreading, and Spread Basis Risk
- Financial Futures Contracts, their Underlying Instruments, Hedging and Speculating
- OTC Markets and Swaps
- Option Strategies: Hedging and Speculating
- Risk-Neutral Valuation and the Binomial Option Pricing Model
- Equivalent Martingale Measures: The Modern Approach to Option Pricing
- Option Pricing in Continuous Time: from Bachelier to Black-Scholes and Beyond.
Professor Goldenberg’s clear and concise explanations and end-of-chapter problems, guide the reader through the derivatives markets, developing the reader’s skill sets needed in order to incorporate and manage derivatives in a corporate or risk management setting. This textbook is for students, both undergraduate and postgraduate, as well as for those with an interest in how and why these markets work and thrive.
Now that we are in an economic crisis, the duration of which is uncertain, a long list of potential culprits is being amassed. Among the culprits are OTC (over-the-counter) credit derivatives. Indeed, it has been argued that the losses on such instruments precipitated the downfall of the major brokerage houses on Wall Street. It is interesting to note that positions in these complex objects were taken in order to protect their exposure to the credit-default risk of mortgage-backed securities. What happened?
Many other arguments have been made against derivatives (?engines of the devil? according to Warren Buffett), most often when something crashes. Buffett does believe in options because he often acquires firms with real asset options in the form of growth opportunities. Under ?normal? conditions, the public pays little attention to derivatives which trade in the background and thereby allow a host of market participants to effectively insure their positions.
Would we be better off without these unintelligible financial instruments? How can we evaluate these strange objects, presumably capable of wreaking so much havoc?
Education is the answer. It is clear that derivatives are not well-understood even among many market participants. This book is a crisp, down-to-earth, theoretically rigorous, but applied introduction to derivative securities and will provide a working knowledge of derivatives to a wide area of market participants, including, but not limited to, finance students.