» Financial Calculus : An Introduction to Derivative Pricing

Financial Calculus : An Introduction to Derivative Pricing Reviews

Customer Rating:
Summary: Not an introduction
Comment: This book is not an introduction to the subject for the following reasons:
- no description is given of the financial instruments they are supposed to model;
- the math necessary is not introduced on an accessible level;
- definitions of anything are chronically missing.
As a result the book is very short but hardly accessible even to people with some background in the subject.
The authors seem to have some sort of practitioners' knowledge of the subject, which however, is not enough to make an instructive text. The style of the exposition is such that at times reads as almost arrogant (e.g. referring to everything as simple and elementary). In fact, the text gives the impression of some sort of an ego trip. I wonder how would they write now when the once mighty Merill is bankrupt (one of the authors was head of debt derivatives in Merill)?
The second part of the text, which is examples of valuations of various derivatives may be of use to practitioners who already know all about the subject, but have not worked with the particular type of instrument.

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Customer Rating:
Summary: Modern And Up-To-Date
Comment: "Martin Baxter
Works at Nomura International in London.
He was a Fellow for four years at Pembroke College, Cambridge, has held a one-year visiting position at the University of British Columbia, and has been an invited speaker to both academic and financial audiences in Europe and North America.

Andrew Rennie
Studied mathematics at Cambridge.
He is presently Head of Financial Engineering at Rabo Bank in London, a position he reached via philosophy, chemistry and graphic design."
[from the book of the front flap]

"The book is the First published 1996
Reprinted with corrections 1997
Reprinted 1998 (twice), 2000 (twice), 2001 (twice)
Printed in the United Kingdom at the University Press, Cambridge."
[from the book]

".....This unique, MODERN AND UP-TO-DATE book will be an essential purchase for market practitioners, quantitative analysts, and derivatives traders, whether existing or trainees, in investment banks in the major financial centres throughout the world."
[from the book of the back jacket]

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Customer Rating:
Summary: Excellent introduction
Comment: I think this is one of the best introductions to mathematical finance around. Unfortunately, the book was out of print when I taught the subject, so I never got to test it as a textbook.

In particular I really like chapter 2, where the authors introduce the key concepts in discrete time binomial processes. This allow them to introduce deep concepts like information and filtration in an understandable manner, while few students really understand measurability. (If you think that is a trivial idea from stochastic analysis, you may want to go for another textbook.) The binomial representation theorem is almost trivial, but show what the general version, the martingale representation theorem is all about, and why it is so useful. Similarly, the Cameron Martin Girsanov is heavy stuff in continuous time, but the idea is simple for binomial processes. I guess a lot of students will understand what the theorem i all about for the first time when they se the binomial version.

The book then goes on to generalize all these ideas to continuous time and space, but with somewhat less mathematical formalism than many other books.

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Customer Rating:
Summary: Second edition please !!!
Comment: This is a great book, no doubt about it...

The basic ideas and tools of mathematical finance (Arbitrage Pricing Theory, Stochastic Calculus, Martingale Measure) are presented in a VERY conceptual way, allowing one to gain solid intuition in a field often obscured by abstraction and formalism. The description of the impact of change of measure on Brownian Motion, among others, is a little gem!

Although the level of mathematics is not overly complex, some sections still require a fair amount of "fiddling" with pen and paper to fill in the gaps and make sure the concepts are clearly grasped. That definitely demands a little mathematical maturity and assertiveness. The section on the Binomial Representation Theorem, for example, could be expended a little, with more concrete examples. But if one spends the time, goes through the book over and over looking at everything in ever finer details (...it is only 200 pages and a pretty quick read), it is immensely rewarding and provides a solid basis to tackle more complex monographs.

The only reservation is about the quick and much rougher presentation of Interest Rates Models. While the first sections on the Black-Scholes framework, Arbitrage Pricing and replication strategies for Vanilla options are very detailed, the Heat-Jarrow-Morton model could definitely be expanded (some of the results presented are not easy to derive given the material presented) and LIBOR models should be covered.

Given the success of the book, one however wonders why a second edition polishing a few sections (see Martin Baxter's website for extra material) and addressing newer developments has not been issued...

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Customer Rating:
Summary: Stochastic Calculus
Comment: Baxter/Renie's book makes it easier to understand Shreve's texts on stochastic calculus (vol.1,2). In particular, ch 2 (discrete) & ch. 3
(continuous) gives nice and simple descriptions of the essential concepts: filtration, measure, numeraire, drift, Ito formula. (These concepts can be difficult without a more detailed description of a stochastic process). The chapters 4,5,6 can be considered applying the concepts to SDE's in a number of cases, say, forex., equities, interest rates and multi-dimensional problems. These applications provide a good grasp of the mechanics to better understand the more detailed description of the same concepts in Shreve's texts.

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