Author Neftci is well known for his earlier (2000) book Introduction to the Mathematics of Financial Derivatives. He is now back with another book ostensibly about the same topic. What has changed? The answer is mathematics. The earlier book is an intuitive, non-rigorous introduction to the sophisticated mathematics of financial engineering—stochastic differential equations, Ito's lemma, martingales, changes of measure, etc. In that book, formulas abound. The new book is more about the markets, products and ideas that underlie financial engineering. Sure, replicating portfolios and risk neutral pricing are discussed, but words largely replace formulas. While Neftci's earlier book competes with books like Baxter and Rennie (1996) or Joshi (2004), his new book competes more with Kolb's (2002) classic.

The book opens with a brief look at markets and their participants. It then proceeds to describe standard linear instruments: forwards, swaps, etc. Repos are discussed. The book then turns to non-linear instruments and starts to explore replicating portfolios. Mixing applications with theory, concepts in financial engineering are developed, leading up to a chapter on the volatility smile. Before the book closes, it also takes detailed looks at credit derivatives and the use of swaptions to hedge mortgage prepayments.

The book's focus is on communicating financial engineering from the dealer's (as opposed to the end user's) perspective. A unifying theme is the notion of replicating portfolios—starting with static hedges and then proceeding to dynamic situations. This is nice for reinforcing for readers how financial engineers think. It does, however, make for some contrived examples. The book's first example is about replicating a Eurodollar loan.