Derivatives Markets

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_mcdonald_robert_(2005).jpg" width="157" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Derivatives Markets</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap2"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 163, 33"> </map> <img border="0" src="../images_title/mcdona29.gif" usemap="#FPMap2" width="195" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="50%" valign="top"> <p align="left" class="body"><strong style="font-weight: 400">McDonald is a competitor for Hull's (<a href="../titles/hull_j_(2002).htm">2002</a>) classic introductory text on financial engineering. It is similar to Hull in that it emphasizes financial engineering theory over practicalities of actual markets.</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table7"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">An attractive aspect of the book is its emphasis on risk-neutral valuation techniques. One criticism of Hull today is that it is outdated. First written in the early 1990s, Hull emphasizes the "differential equations" approach to financial engineering. Recent editions have poorly integrated new material on the "stochastic calculus" approach. McDonald introduces risk-neutral concepts early and focuses on them throughout the book.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Another appealing aspect of the book is its focus on commodity and energy markets in addition to the capital markets, which are Hull's focus.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">There are aspects of McDonald that I don't like. It is very academic. Examples are routinely drawn from hypothetical markets. Rather than give an example based on the S&P 500 index, he invents an S&R ("Special & Rich") 500 Index. He introduces arbitrage arguments in the context of a hypothetical advanced-pay forward market on stocks. Later, he introduces a forward market on pencils. These are all missed opportunities to communicate practical market knowledge.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Theoretically, the book is less rigorous than Hull. Students may not notice, but knowledgeable practitioners will. McDonald seems not to poses the theoretical depth of knowledge that Hull does. </strong></p> <p align="left" class="body"><strong style="font-weight: 400">Unlike Hull, McDonald postpones the use of calculus until as late as possible. His discussions of the Greeks and dynamic hedging are slow going because he refuses to use calculus derivatives. Only in the last of the book's five parts does the author employ more advanced math. Now he suddenly starts tossing around derivatives, integrals and then stochastic differential equations. Needless to say, these final chapters will not be accessible to the readers he was catering to earlier in the book.</strong></p> <p align="left" class="body"> </p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents_compressed">1. Introduction to Derivatives</p> <p class="contents_compressed"><b>Insurance, Hedging, and Simple Strategies</b></p> <p class="contents_compressed">2. An Introduction to Forwards and Options</p> <p class="contents_compressed">3. Insurance, Collars, and Other Strategies</p> <p class="contents_compressed">4. Introduction to Risk Management</p> <p class="contents_compressed"><b>Forwards, Futures, and Swaps</b></p> <p class="contents_compressed">5. Financial Forwards and Futures</p> <p class="contents_compressed">6. Commodity Forwards and Futures</p> <p class="contents_compressed">7. Interest Rate Forwards and Futures</p> <p class="contents_compressed">8. Swaps</p> <p class="contents_compressed"><b>Options</b></p> <p class="contents_compressed">9. Parity and Other Option Relationships</p> <p class="contents_compressed">10. Binomial Option Pricing</p> <p class="contents_compressed">11. Binomial Option Pricing</p> <p class="contents_compressed">12. The Black-Scholes Formula</p> <p class="contents_compressed">13. Market-Making and Delta-Hedging</p> <p class="contents_compressed">14. Exotic Options</p> <p class="contents_compressed"><b>Financial Engineering and Applications</b></p> <p class="contents_compressed">15. Financial Engineering and Security Design</p> <p class="contents_compressed">16. Corporate Applications</p> <p class="contents_compressed">17. Real Options</p> <p class="contents_compressed"><b>Advanced Pricing Theory</b></p> <p class="contents_compressed">18. The Lognormal Distribution</p> <p class="contents_compressed">19. Monte Carlo Valuation</p> <p class="contents_compressed">20. Brownian Motion and Ito's Lemma</p> <p class="contents_compressed">21. The Black-Scholes Equation</p> <p class="contents_compressed">22. Exotic Options</p> <p class="contents_compressed">23. Interest Rate Models</p> <p class="contents_compressed">24. Risk Assessment</p> </td> </tr> </table> </td> </tr> </table> <p align="left" class="body"> <strong style="font-weight: 400">Personally, I prefer Hull's approach of assuming greater mathematical sophistication earlier on in his book. However, I don't care for how either Hull or McDonald employ stochastic calculus. This is one of those compromises that college market texts make. The authors cover stochastic calculus, I think, for marketing purposes. I don't believe that undergraduates follow the discussions in either book. If you have the sophistication and inclination to learn stochastic calculus, you shouldn't be reading either Hull or McDonald.</strong></p> <p align="left" class="body"> <strong style="font-weight: 400">A final criticism of McDonald is his references to juvenile or popular culture. He explains short-selling with an example of short-selling "pokey-baby" dolls. Later, he describes the replication of complex derivatives with simpler instruments as being like "rolling your own." Perhaps undergraduates appreciate such references. I don't care for them.</strong></p> <p align="left" class="body"> <strong style="font-weight: 400">Despite its shortcomings, I prefer Hull to this book. Still, Hull is now in its fifth edition. McDonald has plenty of marketing muscle behind it. By the time it is in its second or third edition, my preference may change. Depending on your needs, there are attractive alternatives to both books. </strong> <strong>[review based on the first edition]</strong></p> <p align="center" class="body"> </script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> <div align="left"> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" bgcolor="#FFFFCC" id="table11"> <tr> <td align="left" valign="top"> <div align="center"> <center> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 6"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/markets_industries_derivatives.htm">Markets - Derivatives</a></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_basic.htm">Financial Engineering - Basic Theory</a></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/financial_engineering_numerical_methods.htm">Financial Engineering - Numerical Methods</a><p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/math_financial_math.htm">Math - Financial Math</a></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/math_software.htm">Math - Analytic Software</a></td> </tr> </table> </center> </div> </td> </tr> </table> </div> </td> <td>  </td> </tr> </table> </div>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>