Avoid murder, then reap the rewards


May 30, 2003

In the past couple of years, numerous new textbooks have been published on financial derivatives, which are securities whose value is derived from the value of another "underlying" financial security. Despite all the information, there is much controversy surrounding derivatives, mostly because politicians, senior executives, regulators and even portfolio managers have limited knowledge of these complex products.

Derivatives: Valuation and Risk Management admirably fills the long-standing gap between texts on derivatives that are too technical for non-specialists, and popularisations that emphasise disaster stories at the expense of communicating key concepts. Presented in an easy-to-understand manner, it provides a solid and intuitive introduction to pricing simple derivative contracts such as forwards, futures, swaps and options. It also explains in lucid detail all the techniques that are needed to manage risk using financial derivatives. The numerous examples and real-world insights provided are clear and very helpful, but unfortunately focus solely on US markets.

Purchasers of the book can download a stripped-down version of FincadXL, one of the leading software packages/add-ons for financial engineering and risk management with Microsoft Excel. Unlike most of the CD-Roms that come with books such as these, this tool really adds value to the learning process, particularly when it is combined with the examples and end-of-chapter exercises. Its downside is that the academic licence is valid for only six months, so that you will have to order the (really) expensive professional version if you like it.

This book is aimed at undergraduates and graduates studying financial derivatives and financial risk management. Derivatives: Valuation and Risk Management provides a fresh picture, and is differentiated from John Hull's standard textbook Options, Futures and Other Derivatives by its simplicity, which makes it a valuable candidate for personal libraries. But one should remember that with derivatives, a little knowledge could be a dangerous thing. Return is supposed to be proportional to risk, but the trick is not to get murdered along the way.

François-Serge Lhabitant is a member of senior management at Union Bancaire Privée (Geneva) and professor of finance, HEC University of Lausanne, Switzerland.


Derivatives: Valuation and Risk Management. First edition

Author - David A. Dubofsky and Thomas W. Miller Jr
ISBN - 0 19 511470 1
Publisher - Oxford University Press
Price - £37.99
Pages - 646

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