Foreign-exchange-risk Books

In his book "Investing in China", William Gamble has provided a thorough, thought-provoking and highly readable study of the subtle and not-so-subtle nuances of the Chinese legal and financial infrastructure and apparatus. This is a "how the Chinese system really works" (or doesn't work) guidebook that should be read by anyone contemplating an investment or business dealings in China. Gamble covers the spectrum of contracts, bankruptcy, real estate, securities, judges and lawyers in a work that is full of informative, interesting and intriguing information and anecdotes. Even if I wasn't interested in China trade, I would have enjoyed this book.

Mark Ellison, President
Seven Continents Media LLC

I first became aware of China specialist William Gamble when I saw his comments earlier this fall in USA Today (of all places). Funny and frank, he's the rare investing expert who's made me laugh. So I picked up his highly readable book which also pulls no punches in precisely outlining and analyzing Chinese legal and economic structures. In explaining the Chinese market's myriad weak links, Gamble is direct, down-to-earth, systematic, involving, understandable, and persuasive. In this valuable, actionable text he effectively makes his case that these legal risks are real and relevant to international investors. When the egg breaks it will be messy. Having enjoyed and learned from it, I recommend this book without reservations.

I wouldn't call it an "Investment" book in the usual sense, however it gave me new and valuable insights into the legal aspects of doing business, or investing in Mainland China.

There is much talk these days, about the coming China boom, but until now, no one seems to be discussing the additional risks of doing business in a region where contracts are often declared void on a politician's whim.

My own international dealings have been mostly in Western Europe, where the legal systems function in a way similiar to our own in the US. Mr Gamble makes clear that things work very differently in China, and that you ignore these differences at your peril.

I should add that "Investing in China" is an excellent refresher course on business law, and it's importance to the international investor. His writing is clear, and to the point, without being patronizing.

Not a heavy tome written for the legal professional, but rather a good read, written by a legal professional, for the rest of us.
Highly reccomended! Well worth your time.

This book is the best guide to FX markets and the corresponding instruments. The book structure and contents are extremely well planned and written to provide not only a beginner with first hand knowledge, but can be a good refresher for others.

This book is a definitive masterpiece.

In his book, Mr. Ira Kawaller covers an amazing range of topics from risk managemant to stock options. I have never read a book so incredibly exciting in all of my life. Mr. Kawaller knows how to display the facts, provide informative facts, and decorate it all with a wit and charm that thrives in his book. "Financial Futures and Options" is THE book for risk management lovers everywhere. This book inspired me to change my career choices. After reading "Futures" (in one sitting!) I knew that prostitution and drug dealing was just not for me. I am now an economist making over $600,000 a year and loving it. Thank you, Mr. Kawaller. You turned my life around. (From what everyone is saying, I believe Mr. Kawaller now runs his own business called Kawaller & Company in Brooklyn, NY. If you ever need help financially, Mr. Kawaller will personally see to it that you get back on track. After all, risk can be managed if it is faced in a disciplined way. Ignore it and you face disaster. E-mail Kawaller and Company at kawaller@idt.net and good luck!)

foreign exchange rate ris

Alex Lipton's Mathematical Methods for Foreign Exchange: A Financial Engineer's Approach is a comprehensive study of models used in practice for the pricing and hedging of derivatives. Despite the focus on foreign exchange, the methods detailed in the work go far beyond FX to apply to a number of other asset classes (e.g. equity, commodity, and some fixed income and credit derivatives). The core of the book applies the theory of parabolic partial differential equations to solve a vast number of problems that arise in the pricing of European and path-dependent options. It is difficult to find all the methods covered in the book treated in one place, and many are not documented elsewhere.

The emphasis is on a mathematical treatment that highlights the structure of the problems at hand, not on numerical solutions to these problems. Important though numerical solutions are in their own right, they are far less illuminating in understanding the problem itself, and can easily be obtained with the appropriate mathematical tools, developed in this book, at one's disposal. The value of the work is further enhanced by the meticulous referencing and extensive bibliography that it provides.

Having worked in the industry as a quant in foreign exchange, and in academia, I can strongly recommend this book to anyone interested in a rigorous mathematical treatment of the problems arising in the pricing and hedging of derivatives.

A highly detailed mathematical book on exchange rates. I'm not qualified to review the quality of the work, but just be clear that this is high level stuff only appropriate to quants.

Dear Mr. Lipton,

I will try to write from my hearth.

It is beyond any doubt that you have a deep understanding and knowledge about fx option pricing models. However, I feel that you are not sharing that knowledge with us, as a good teacher would do.

What is missing in your book is some fine examples of the complete procedure, for an example for the Heston model. The best book I have read on this topic is "Inside Volatility Arbitrage". The only thing missing in that book, is the code for actual parameter optimization. It is mentioned that the optimization is done with Powels method from Numerical Recipes in C, however how the initial solution is guessed is not specified. Even still one can try brute force searching in parameter space as a initial guess. Other methods exist also. Either way, "Inside Volatility Arbitrage" is a fine book on this topic.

I'm sure sure that you are extremely well acquainted with the numerical procedure and difficulties in option valuation, therefore because that part is really missing in your book I must conclude that you are not really sharing your deep knowledge with us, trough your book. Therefore I must value your book with only 2 stars.

With Kind Regards,
Aleksandar Mojancevski

I have been using this book since I was a graduate student and, now working as a quant, I always keep it handy. The various techniques I have learned from this book helped me to solve a lot of problems related to financial engineering which I have encountered in my both academic and professional career. The book covers a lot of advanced material, most of which is original and unique, starting from pricing path-dependent options in the discrete binomial model up to pricing path-dependent volatility products under stochastic volatility models. I will briefly go through the content of the book and make appropriate comments.

Chapters 1- 4) The author introduces the sufficient background which is necessary to solve financial problems arising by pricing and risk-managing of derivative securities, in particular, the stochastic calculus and backward/forward partial differential equations (PDE). By itself these topics are nowadays extremely broad and cannot be fully developed even within a series of books. In this book, only important results are given (and references for more specific texts are provided); these results will further be applied throughout the book and they include: basic properties of Brownian motion, connection between the diffusion problems and solutions to backward and forward Kolmogoroff equations, Ito's lemma, solution of SDE-s by discretization, solving PDE-s with Laplace and Fourier transforms, eigenfunction expansion.

In chapter 4, the author does tangentially mention about numerical solutions of PDE-s. Here, it is important to note that PDE numerical solution methods are outside of the scope of this book, although the author almost always presents the problem as a solution to certain PDE so a relevant PDE solver can always be applied, the main scope of this book are analytical methods for solving PDEs. However, the author does illustrate the Crank-Nicolson and Crayg-Sneyd ADI scheme, which are the methods of choice (whether robust or not) at the majority of Wall Street firms.

Chapters 5-6) The author fully develops the binomial model and carefully explains no-arbitrage pricing principles. What is important and, perhaps, is unique in his treatment of the binomial model is that he describes extensions of the model to the so-called implied trees, and, which is very important for pricing exotic options in the binomial model, he describes the augmentation principle to price path-dependent options, including American, asian, barrier, and lookback options.

Chapters 7-9) The author studies continuous time dynamics for FOREX evolution (although by no means is the treatment specific only to FOREX) and pricing principles for European options. He applies various techniques from applied mathematics to solve a variety of pricing problems, including multi-dimensional problems, in an efficient way. These highly useful techniques include non-dimensionalization, Laplace and Fourier transforms, approximations, Green's functions, or the state-price densities in the jargon of finance texts, which are extremely important for solving problems (and building analytics) in their generality .

Chapter 10) It is well known that often the pure log-normal model is not satisfactory in practice for pricing and risk-management of derivative deals. To go beyond the Black-Scholes model, the author introduces and discusses a number of possible alternative models for FOREX evolution and shows how to treat these alternative models efficiently using a variety of mathematical tools. In particular, he develops the analytics for the Heston model and derives perturbative expansions for general stochastic volatility models. He also uses this expansion to analyze the properties of the Heston model

Chapter 11) I think this is one of the most comprehensive treatments of options with American and Bermudian exercise. The author shows how to solve the problem using PDE, integral equation and approximation methods.

Chapters 12-13) These two chapters provide an extremely useful technique for solving a number of complicated problems arising by pricing path-dependent options. The author develops one of the most useful techniques for solving pricing problems of exotic options (and which is completely missing from other quant books) - the augmentation principle that involves introduction of the auxiliary variable describing some functional of the process (for example, its average, maximum, crossing times etc) and augmentation of the pricing PDE with an additional dimension representing the evolution of this auxiliary variable. This augmentation technique is applied to solve a number of problems including pricing of barrier, asian, lookback, Parisian, passport options etc. Let me also note that passport options were originated from the Bankers Trust and the author played a leading role in developing analytics, which is very thoroughly introduced in the book, for these products. He also describes some departures from the log-normal model and shows how to apply alternative models, for example, Heston and CEV models for pricing path-dependent options.

Chapter 13 provides one of the most comprehensive in the existing quant literature analytics for path-dependent options. I strongly disagree with one of the reviewers that the author does not explain the Heston model and I point out that the book the reviewer is referring to does not include application of Heston model to pricing forward-start options and options on the asset realized variance. The pricing of European options under the Heston model is by now well documented (needless to say that the author was one of the first to introduce now widely used pricing formula involving one integral as opposed to the original formula including two integrals), however in practice the Heston model is most often applied for pricing volatility products (forward-starts and options on the realized asset variance) and the author does develop the necessary analytics to solve these problems, the part which is missing from existing texts.

Finally, Chapter 14 discusses some advanced topics - hedging under model parameter misspecifications, liquidity risks, and counterparty defaults.

What makes working on this book enjoyable and rewarding (I must note that it is not a book for after-lunch reading but for hard studying) is that never does the author leave important steps in his derivations omitting rather lengthy but trivial results "for the sake of brevity". Also all author's derivations and conclusions are self-consistent and no external references are made to derive or substantiate a proposition so that you are never stuck with a problem for which you have to consult other texts (the practice which is often abused in most of the quant finance texts).

To conclude, the author, who is one of the top Wall Street quants and applied mathematicians, does not give you a ready solution, discuss a "model calibration" and provide with "code examples", instead he teaches you how to apply the best suited techniques to solve specific problems and makes you participate in his discussion by filling the gaps. For graduate students I can tell that the experience and analytical stamina you get after working on this book are much more valuable in your professional career perspective than all that "light" stuff, including model calibration and implied volatility parametrization, which you will read from some other "quant" books - you will quickly pick that up once you have started your professional quant career.

I own pretty much all of the books on quantitative finance
and this one holds a cherished place on my bookshelf.
Anybody either working as a quant or with aspirations to become one should dust off some space on their bookshelf as well.
Anybody who does serious research in finance in either academia or industry already knows that it is somewhat rare for top researchers to pen books of any length. Time is at a premium and the payoff to publishing journal articles or to finishing off code is typically much greater than it is for writing books.

This is what distinguishes this book from its competitors.
The author is well known in financial circles as one of a handful of quants who is capable of meaningfully contributing new results to this fascinating field. The book contains many results which cannot be found elsewhere in the public domain.
Although the book title suggests that the results apply only to
foreign exchange, it is straightforward to adapt the results to

equities, commodities, and many other underlyings.

Wall Street is a very secretive place and it is not easy to get a glimpse of the kind of things that consume a quant's time.
I suspect that the only reason that this book was able to come to light is due to the acquisition of Banker's Trust, the author's former employer. Banker's was well known to be a fertile training ground for the best derivative minds and this book should prove to be a lasting legacy to that view.

The author performs a complete and delicate post-mortem of modern capitalist beliefs and misconceptions. I read Ayn Rand's "Capitalism: The Unknown Ideal" some time ago. Daniel Ben-Ami constructs a compelling argument in favour of unregulated markets, healthy competition and good old fashioned risk taking. Unlike Raynd he steers away from abstruse philosophical theories and sticks with what really matters to the reader: Real life examples, cataloging the myriad failiures of faux-capitalism. If like me you whince every time you hear about another ill-thought out but well intended goverment safeguard, you'll enjoy this book for the intellectual ammunition it delivers.

Let�s start out this review by stating up front that we disagree with Daniel Ben-Ami�s assertion that a preoccupation with risk measurement and management is a detriment to the global economy. With that out of the way, we can say that Ben-Ami presents a unique analysis of the modern global economy that is not at all without merit. His contention that lagging growth is a greater peril to the world�s economy than financial instability is reasonable and backed up by ample evidence and illustration. And his position that increased regulation could be doing more harm than good will be embraced by all free traders. On the basis of these discussions alone, we [...] recommend this book to anyone thinking seriously about international financial systems. But this book is perhaps most useful as a starting point for debate, which it will certainly generate in the mind of any informed reader. While you might quibble with Ben-Ami�s conclusions � as we do with his assertion that the threat of the 1990s financial crises was overblown � you will not be bored.

Usually, books on the dry subject of modern finance are a difficult read but this one is a welcome and worthy exception. The text is so fascinating that I managed to "make it" in three rather short sessions - and without the slightest trace of boredom in the process. I found no superfluous or pseudo-profound sentences and even the footnotes of this carefully researched study fully deserve the reader's attention.

Ben-Ami manages to explain in a few dozen pages the basics of apparently difficult concepts (as he rightly tells us, "even the most complex strategies tend to be built from simple components") such as derivatives, mutual funds, pension funds, hedging, etc. In the process, he shatters a lot of mistaken myths and conventional wisdom.

It is simply not true, he explains, that the instruments of modern finance are essentially speculative; on the contrary, they are usually a means for corporations and investors in general to better manage risk. Modern capitalists, unlike their predecessors of a more dynamic era, have an exaggerated aversion to risk and they try to build their portfolio in a way that minimises it. Thus a corporation dedicated to making cars, for instance, might prefer to invest part of its earnings in derivatives or hedge funds instead of innovating its production processes. The result would of course be a less dynamic form of capitalism, where more resources are spent on the financial markets - as opposed to the real, productive side of the economy. This, insists Ben-Ami, is in short what has been happening since the end of the post-war (1945-73) economic boom.

He offers powerful examples to illustrate his thesis. Yes, he says, it's true that George Soros made a billion dollars out of speculating against the British Pound in the early nineties - but that was only because the fundamentals of the British economy were really incompatible with the high value of its currency. A few years later Soros was betting on a fall of the Rouble and eventually lost two billion dollars. This time he had made a wrong analysis of the fundamentals of the Russian economy and got his fingers burned. The conclusion? Well, speculators really don't have the power to dominate events. So much for the idea that modern economies are but passive instruments at the hands of unscrupulous capitalistic sharks!

Ben-Ami regrets the general climate of fear for the future and horror of risk-taking that he thinks has taken hold of Western Europe and even more the USA in the last few decades - and has been, BTW, amply demonstrated in the recent near-hysteria caused by the appearance of a few cases of Anthrax in the US. He sees in this tendency a sign that the "animal spirits" that Keynes considered essential for the proper working of a dynamic capitalist economy are faltering.

The author doesn't present us a "solution" for this problem, probably because he's well aware of the fact that cultural attitudes are very hard to change. But he does warn that the climate of fear that currently permeates western society constitutes a clear impediment to stronger economic growth, both in the First and Third worlds. And he writes in such a clear, unpretentious style that one might just hope his analysis will eventually find a sympathetic hearing in the decision-making centers of Europe and the United States.

This is a decent enough book and will provide a good introduction to those who want to understand the basics of the foreign exchange market and, in particular, the details of financial instruments that can be used. To me, that is the problem though; the title alludes to managing risk, but this is really mostly (but not entirely) just yet another book explaining all the instruments that can be used. These are a dime a dozen and the reader would have been better served if the author focused on what the title promised. Still, if you are a corporate treasurer without much experience this book will be helpful.

Homaifar made complicated material more easy to understand. The examples provided help explain the subject matter thoroughly. Definitely a must-read!

Dr. Homaifar has done an outstanding job of presenting some very complex material in a clear, concise manner with excellent examples. I highly recommend this book to anyone interested or involved in finance and investing.

Contents Include:

* Currency Derivatives: A Guide for Practitioners (G. Hopper)
* Everything You Ever Wanted to Know about Currency Futures..(H. Taylor)
* Central Banks and the Currency Markets (A. Hodge)
* Speculative Trading and Hedge Funds (M. Rafferty)
* Fundamental Analysis (Earl Johnson)
* Technical Analysis (T. Basso)
* Option Strategies (Neil Record)

* Maximizing Diversification in International Investing: New Opportunities (V. Parker)
* Immunization Strategy for Multinational Fixed-Income Investments (Hauser, Levy, Yaari)
* Currency-Hedging Foreign Investments: Why Bonds and Equities are Different (Lee Thomas III)
* Measuring the Performance of Currency Managers (B. Strange)

* The relationship of Management To Effective Risk Control (Alex Koh)
* Risk Measurement (Linsmeier & N. Pearson)
* The Uses of Analytics (E. Zask)
* Passive versus Active Management (L. McNew)
* Foreign-Exchange Risk Management at Tenneco (James West, Jr.)
* Regulatory Issues: Accounting and Financial Reporting for Instruments Subject to Global Currency Risk (Herz, Linsmeier, Bhave)

This book contains some useful stuff for those hoping to understand exchange rate risk management. Unfortunately, being a collection of articles by different authors, it also contains a lot of stuff that is less useful and lacks coherence. A good book for those involved in risk management to delve into on occasion. Beginners need to be careful as it seems to contain some questionable arguments.

Is a very good introduction for a Foreign Exchange Market. Specially in futures markets

Hidden Markov Models have come into vogue in recent years in various fields. Notably automatic speech recognition. An HMM is useful in a Bayesian context, where you have to work back from some observations to discern an underlying probability model that is supposedly generating those observations. Often in the presence of noise. Well, it turns out that this general description can also be applied to financial models, which is the book's subject.

Various specific models are tackled. Including the seminal Black-Scholes, where the security market is modelled as a Markov modulated Brownian. Typically, the maths in the book uses sophisticated probabilistic analysis and often assuming Markov processes. As an aside, if your field is electrical engineering or information theory, where you might have used Markov processes, then your background should suffice if you want to migrate to finance. It's not that different, at a certain conceptual level.

The book could be improved by the addition of an index.