Hedging

I have read this book... from a learning perspective of trying to learn what the theory behind options pricing is it is a great book. A lot of more recent topics are missing, but as a starter book for those who already price options/work in the industry without having learned all the theory (or in my case forgotten what they learned in school) it is a great read and a great reference.

This book covers quite a few fields (axiomatic probability, stochastic processes, financial theory) to the extent that they relate to valuation of securities. Naturally, the scope of coverage in such a brief tome (< 300 p.) is limited. It is written clearly and with precision, with sufficient number of exercises provided at chapters' ends. I would say that it goes to greater depth than Neftci, and is far more rigorous than Wilmott. Incomparably easier to understand than Merton. The only shorcomings I can find are relative paucity of examples and inadequate Index.

The language of financial derivatives is, arguably, the language of the modern theory of martingale stochastic processes. In this approach pricing contingent claims is reduced to finding an "equivalent martingale measure". Practitioners would think in terms of risk adjusted or risk neutral valuation. To understant this topic from an abstract and rigorous point of view is a daunting task restricted to a relatively small elite. For those seeking to learn the mechanics of this discipline a good foundation is well provided by the texts from Hull, Options, Futures and Other Derivatives, as well as Jarrow & Turbull, Derivatives Securities. These books present the intuition behind the formulas and how to use them in practical situations, but they do not show where the formulas come from and much less the mathematics necessary to prove them. Before the book under review was published, this task was attempted by other authors with mixed degrees of success. Here we briefly mention three of them. Baxter and Rennie's Financial Calculus (233 pages) is written in an informal fashion about deep mathematics and one has the feeling that the essence of the topics covered can be grasped and understood from it. However, behind this innocent style there is a huge amount of sophisticated machinery that, in my opinion, should have in part been presented in more detail. An instructor is left with the feeling that it could have been much more profitable to work a bit harder on the students and give them a more complete picture of the theory. Next comes Neftci's Mathematics of Financial Derivatives (352 pages). Its language is more accessible than Baxter and it gives a more detailed and extensive description on most topics. Mathematically, though, it falls short of current usage and rigour. The book by Musiela & Rukowski, Martingale Methods in Financial Modelling (511 pages), is far more difficult than any of these and should be read and understood only by a few. It requires previous knowledge of stochastic processes at the level of, for example, Probability with Martingales by D. Williams. The book under review is an excellent text for courses and for individual readers with a modest background in probability. There is no compromise with mathematical language and concepts. They are presented precisely and illustrated by examples without the burden of more technical theorem-proving approach in advanced mathematical texts. After introducing the idea of derivatives and risk-neutral valuation, it gives a summary of modern probability theory including measure, integral, conditional expectation, modes of convergence, characteristic functions and the Central Limit Theorem. This sets the framework for the rest of the book. Stochastic processes and finance in discrete time are not pre-requites for the much more complicated continuous time but serve as a pedagogical preparation for it. The Third and Fourth Chapters are dedicated to the discrete case and key concepts are carefully analysed. Information and filtrations are discussed as well as the important random walk processes as a motivation for the Brownian Motion. The culmination of these efforts is the proof of the Fundamental Theorem of Asset Pricing: in an arbitrage-free complete market there exists a unique equivalent martingale measure. A very readable discussion on binomial trees is given, including the proof that in the limit of small time increments one recovers from it the usual Black-Scholes formula for a call option. Chapters Five and Six are dedicated to stochastic processes and finance in continuous time. This includes filtrations, a sketch for the construction of Brownian Motion, quadratic variation of Brownian Motion, stochastic integrals and Ito calculus, stochastic differential equations, etc. A continuous version of the Fundamental Theorem is discussed but not proven. The main formula for risk-neutral valuation in terms of expected values is proven. A general result about the relationship with other approaches is that solutions to partial differential equations have a stochastic representation in terms of expected values (Feynman-Kac Formula). On p. 211 a discussion is presented regarding our knowledge concerning continuous time securities market in comparison to the discrete case.

If you are really interested in understanding the probabilistic foundations of modern financial derivatives theory, please consider seriously this book. Another reference, in the same spirit that I recommend is the excellent notes from Shreve, Stochastic Calculus and Finance, which is not yet in book form. After reading the text by Bingham and Kiesel you will gain a solid background well worth the effort and will be able to read profitably most of the contemporary texts and articles on this subject.

I consider the book a perfect guide written by a professional for professionals. If you are looking for scientific completeness and complication, go somewhere else. If you are looking for a competent down-to-earth reference, this is your book. I wonder when the third edition of this valuable tool will be published.

I work in the securities industry, and this book accurately described the markets and products without the detailed mathematics. I would recommend this book as a first reading before the Hull and White book which is much more mathematical.

Too bad it's out of print. I'd like everyone in my group to have a copy.

Professor Van Horne Books are certainly fundamental to approach right the theory of finance. I think we have all to thank him for his studies.

A compact book focusing on fixed-income market, derivatives, and risk management. Highly Recommended for advanced undergraduates

In this text, Van Horne combines elements of both finance and economics; this results in an outstanding compendium of financial theory as it relates to financial markets. However, the breadth of the material and the detail to which the reader is exposed necessitates succinct dissemination in such a compact text (300 pages). I've found more information in this paperback than most hardcover texts (800 pages or more) that I've read, and at half the price.

My fellow students and I plowed our way through it in one 400-level course in the finance program at EWU. This is advanced material and not for the faint of heart. As I remember it, there was a sizable number of students with weak hearts about half-way through the quarter.

good functional book. keeps things simple

This book does a very nice job of both explaining how exotic options work and one's motivation for using complex derivatives. Good graphs, appropriate use of equations, and plenty of actual market-based examples.

Nelken is a clear explainer of how exotic options work. One of the key features of his work is to provoke thought about useful approaches to evaluating the products. There are no pat answers when dealing with exotics, but Nelken charts a fine road map.

Bought this book in anticipation of fresh ideas. For the beginner this is a great way to get the mind flowing with new thoughts.

Personally I didn't find that it sparked anything new for me. But what doesn't work for some may work for others. If your a seasoned trader I wouldn't get it, but if you are a beginner I would order it right now.

James Altucher is a professional money manager and a contributor to TheStreet.com who has assembled a collection of "20 successful uncorrelated strategies and techniques" for trading the markets. His first book effort is one of the most practical trading guides I have encountered.

What sets "Trade Like a Hedge Fund" apart is that we don't have to take the author's word that these strategies are successful. Included in every chapter are the specific rules for each strategy and the tested trading results over the recent past. I particularly like the fact that he has tested the results across broad market indices and individual equities. For example, Altucher creates his own version of the famous "Turtle" trend- following system and tests it on the S&P 500 Index, the NASDAQ 100 stocks, and a basket of uncorrelated stocks. This very much helps display the robustness of the underlying trading concept.

Among the specific strategies disclosed and tested are a unique method for trading the spread between S&P and NASDAQ stocks; an intraday method for trading the Cumulative NYSE TICK; a short-term trading system that makes use of Bollinger Bands; a technique for allocating money to bonds; and a straightforward method for arbitraging preferred and common stock of companies.

Where I think this book is strongest is in illustrating how a professional hedge fund manager thinks about the markets. Many of the strategies are designed to take advantage of extremes in the market, where inefficiencies are most likely to be present due to traders' panic and overconfidence. Altucher's creativity in searching for these inefficiencies stimulates the reader to engage in a similar search. Reading the chapter on the NYSE TICK, for example, I soon developed my own promising variation on the author's strategy.

Are there weaknesses in the book? I found the text to be clearly written and well-illustrated with charts and tables. The systems were designed and tested with the Wealth Lab program, but the specific code for each of the systems is not included in the text. An exception is the pairs trading system, which is one of the most creative strategies in the book. The strategies are geared more for swing and intermediate-term trading than "day-trading", with the TICK system a notable exception. My sense is that creative researchers could adapt some of Altucher's ideas to shorter-term trading--particularly the pairs trading technique and the strategy for buying market "crashes".

Altogether, "Trade Like a Hedge Fund" belongs to a genre of books inspired by the work of Victor Niederhoffer (who Altucher acknowledges in his introduction). The focus is on scientifically-tested trading concepts, not discretionary, subjective ones. Where Altucher may differ from Niederhoffer is in his willingness to adapt traditional technical analysis tools (such as Bollinger Bands and gaps) to quant trading. As a matter of disclosure, let me say that I have corresponded with Altucher about his ideas, but this review was not solicited by him or his editor (who happens to be my editor as well). The best thing I can say about the text is that it has given me ideas for my own research and trading. I can't say that about many trading books.

Brett Steenbarger
www.brettsteenbarger.com

When I was on the board of a not-for-profit organization, I asked one of the major contributors for what amounted to a 25-fold increase in funding. He politely declined, telling me, "Stick to the meat and potatoes issues."

Well, "meat and potatoes" is what you get with Altucher's book. It's chock-full of techniques and mechanisms successful pro's use to earn ongoing, market-beating profits for their clients. From Page One, it's clear this is a no-nonsense read. Altucher doesn't waste the reader's time spewing self-aggrandizing war-stories, nor does he find himself mired in personal biases or widely-held market fantasies. Rather, he gets right down to the business of trading, taking a realistic, "whatever works" approach, including methods based in both counting (statistical analysis) and what is popularly referred to as "technical analysis." There is discussion of trading gaps, spreads and "the tick," moving averages and bands, and other lesser-known techniques including buying bankruptcies, taking advantage of option expiration day, and deletions from indexes. Each is clearly explained, using real-world examples, and all are augmented with very well done charts, graphs and data tables. Throughout, Altucher debunks a number of market myths and he kindly includes a short chapter on "what doesn't work."

Mind you, this book is more for seasoned investors than it is for rookies, though aspiring novices need not be discouraged from buying it and studying the techniques. It's about "trading," which is significantly different from longer-term, buy-and-hold "investing," and not to be confused with risky "day-trading." To make best use of the material, one should have a reasonable market vocabulary and it wouldn't hurt to have a few math skills, but if not, you'll still be able to make plenty of sense out of Altucher's plain speaking.

The principal criticism of "trading systems" is that once they're made known, they won't work anymore, or for very long thereafter. This is quite true. I've heard some say about Altucher's book, "Gee, how could he do this? Once the word's out, we won't be able to trade these again." Wrong. What Altucher offers is NOT a "no-brainer-get-rich-quick-doing-things-my-way" trading system designed to make the author rich by doing nothing more than selling books to the unsuspecting wannabe. If that's what you want, don't buy this book. What it is, and why you should buy this book, is a collection of proven professional techniques that, when applied thoughtfully and within reason, can over time help to make one a very successful trader.

That this book has been bundled with Niederhoffer's "Practical Speculation," and that Altucher mentions this and its predecessor "Education of a Speculator" first among all books in his reading list is telling. Niederhoffer has indeed written the Old and New Testaments of Market Speculation, and in "Trade Like a Hedge Fund," Altucher has written the Concordance. The bottom line? If you're a seasoned investor or an aspiring rookie, and you want to learn to be a successful trader, you can't afford not to own this book.

With a rolodex of of brokers, analysts and CEO's at their fingertips... Cramer & Co. spent their day hyping or deflating stocks (depending on whether they were long or short), or just trying to get a reading of where the analyst community was (hoping to short or long the stocks -- which they would then go on to hype or deflate)... in the end, of course, the poor sucker holding the bag was John Q. Public.

So is this what hedge fund managers spend their day doing? Is this what trading was to Cramer & Co. (manipulating and in cahoots with Wall St. analysts)? Are analysts nothing but cheerleaders for their favorite stock of the day?

Oh, what a web of deceit and collusion Wall St. is...

Cramer is acutely intelligent, and as many more now know, a real human being. I've been a jjc fan/supporter for years and this book offers not just new insight, but the opportunity to empathize with Jim in a new way. This controversial, very passionate guy cares, and wants to do the right things. Jim and I communicated quite a bit during many of the times when one pot or another appeared to be boiling over. Jim rarely has a cool head. His manic is based in passion, and I value it even when we find ourselves on opposing sides of the argument. He is a good honest guy, and things matter to him.

But I'm not writing a testament to Jim Cramer.

If the public wants to better understand the inner workings of Wall Street, read this book. It may make some think again about what it takes to beat the market, and it will probably scare off some who think they can. The book would be of tremendous value to Wall Street up and comers or those who think they want to head in that direction - to get a true feel for the game, and what a game it is. As "Confessions" shows us, Wall Street is about big money and good coverage...and of course relationships (most importantly perhaps, having a good strong, wickedly smart "woman" by your side.)

Great work Jim. Your style and story make for a great read.

Look, here's the deal. If you want to learn how to trade, this isn't the book for you (nor does it claim to be). But if you're a pretty savvy trader with a burning desire to learn all you can about the Market, there is a lot of "inside baseball" here. You'll pick up many subtleties about the economy, the market, and the inner workings of Wall Street that WILL help your trading. I know I did.

If you're a Cramer-Hater, you'll love the book because he fesses up to his many flaws and you'll feel vindicated for despising him. You will, of course, then log onto Amazon and write a lousy review because it just kills you to think that Jim Cramer might make a buck from his book. If you're a Cramer-Lover, you'll enjoy this book immensely because it's vintage Cramer-you've gotta take the bad with the good. I came away with the impression that he is his own worst critic-although from the vitriolic reviews I've read here, I'm going to re-think that conclusion. But love him or hate him, if you trade in today's market (or if you blew out in 2000 and want to know where you went wrong), you need to read this book. No responsible trader or market watcher should ignore any book written by someone like Jim Cramer. After all, this isn't a popularity contest, it's about learning as much as you can about your craft. And even if you aren't a trader, this book is an entertaining read because Wall Street has just become too big to ignore.

This book is what it claims to be: the confessions of a "street addict." I stayed up past midnight to finish it, and I trade from the West Coast. I will also read it again.

Mr.Schwager is intensely passionate about the markets. This comes through in his thorough analysis of the markets. He has no problem dissecting the fundamental and technical aspects of the market as easily as Michelangelo would paint the Sistine Chapel. His style is heavily influenced by statistics and high level mathematics. His entire voice is centered around the belief that the market can be predicted through analysis of the numbers. Unfortunately, for most people that is not the case. It also seems not to be the case for Mr.Schwager as well, since he admits in his book that he is not a good trader.

That being said, his book is a great reference tool that gets the average trader to stretch himself mentally and look at the markets in a different way. This book ... can be invaluable for the trader that is simply looking for a new perspective besides simply "flags", "candlesticks", and "elliot waves".

Schwager's textbooks while not specifically about spreads are comprehensive and complete about futures. This book has a small section about trading commodity futures spreads.

This book could be renamed as "The Mathematics of Trading". The traget readers are traders who use lots of Mathematics and Statistics.

The experience of Schwager helped me a lot. He said he was good in analysis but not trading. Many people, including me, thought Mathematics, Statistics and Economics were essential for good trading. So they went to college, studied hard, got a degree and hope they could make money in the market. This simply never happen! Otherwise everyone should got a PhD before trading. You still need to develop a method or system. But what is vital is to control your ego. Admit mistakes quickly. This was the most interesting and useful conclusion that I got from Schwager.

The book is for those with a Phd or strong math background - the writer does not attempt to cater to anyone else. Don't bother trying to understand the models discussed if you don't have this knowledge - get your Phd first! A waste of money unless you know mathematical concepts such as MLE, Fast Fourier etc.

This is by far the best book in the area. It brings in details all the current technical discussions allowing even the reader with minimal math background to understand and even try the techniques stated in the book. Every risk manager must have it at least as a reference. The author carefully describes several techniques as:
1) Loss distribution approaches;
2) Scorecard approach;
3) Extreme value theory;
4) OpRisk management models;
5) Modeling and developing hedging programs.

Excellent value for the money!

This is the best book in operational risk by far. It shows, on a very clear way, how to implement complex algorithms that can be used in the measurement and management of oprisk. The most interesting part of the book is the one on oprisk management and oprisk stress tests and scenario analysis. Superb! Every risk manager should have it at least as a reference.

This book is definitely not worth its price. Basic option theory and knowledge on VAR is wrongly interpreted. The book gives no insight on what energy risk management realy stands for. Utterly disappointed !

This book provides an excellent background and review in easy to understand language about energy trading and energy risk management. I highly recommend it for understanding the basics of this complex subject. It also provides a global overview of market developments. It is not, however, a quantative treatise on energy and financial derivatives. This is a primer that should be viewed as such.Fusaro's second, Energy Derivatives: Trading Emerging Markets, is the companion piece to this book and adds the newer commodities of weather, emissions, bandwidth and coal derivatives. I recommend it as well.

Until Peter Fusaro's book "Energy Risk Management" hit the bookstores in 1998, anyone needing a clear explanation of how risk is managed in the energy markets had to sift through numerous trade publications and journals.

This was genergally the reaction of any industry participant I spoke to, independently of whether they were clients, students or collegues of mine both from the Energy community or from academia. Therefore, with this feedback, I would strongly encourage my collegues to read Peter Fusaro's new book "Energy Derivatives: Trading Emerging Markets" which he edited with Jeremy Wilcox and was published in October of this year. In this book Peter Fusaro and his team of energy professionals take the reader deeper into the secondary markets (energy derivatives, etc.) which have emerged as a result of the deregulation process of the Energy Industry and, most importantly, the book explains how to use these markets to manage energy risk. Further, in chapter 3, 4, 5 and 6 the reader is introduced to the concept of interdependency among energy markets and other related markets. These include weather and weather derivatives, emission trading and bandwidth - the most recently emerging market converging with Power to become the backbone of the new global economy. This is the first book to address the complex topic of convergence of power and the rapidly growing bandwidth market. For this reason alone this book becomes a must for everyone who is interested in becoming a part of the evolving energy market.

This book provides a healthy dose of practical wisdom for options traders so that they don't blindly follow their mathematical models into oblivion. The author (Taleb) has a PhD in finance, but also has traded in the pits, he knows both theory and practice and where they diverge.

Taleb focuses on hedging, which is a trader's main task when running a large portfolio of options. Instead of using a flood of equations, Taleb relies on charts, graphs, and tables to make his points. Most of the equations & heavy mathematics are relegated to the appendix, presumably because quants (or software) will price the instruments. He covers the behavior of the Greeks (delta, gamma, vega, theta, etc.) for vanilla options as well as behavior of exotic options, and delves into the practicalities of volatility, hedging at discontinuities, and various other topics.

The book is very popular on trading desks, and although I found it pretty good, I didn't find it to be outstanding. Also, notably, the book does NOT cover credit & interest rate derivatives at all; hopefully this will be corrected in the next edition.

So if you need a book on the practicalities of hedging a portfolio of vanilla/exotic options, then get this book. On the other hand, if you want some basic options theory, or want to focus more in pricing, or need a basic introduction, look elsewhere (perhaps to Hull's or Wilmott's books).

Yes, this book could use an editor - there are all sorts of errors everywhere. While it makes the reading pretty tough, I think this is really one of the most useful books on options around. It's a little like Campbell/Lo/MacKinlay's book on empirical finance, but with a more experienced and real-life perspective. It's a bit refreshing after all the copycat books on option pricing that still don't contribute much beyond what Hull has written. No question, top 5 in practical finance reading.

It is nearly impossible to write a book that is both mathematically rigorous and sufficiently down to earth to be accessible to the professional trader. This book is a step in the right direction. It maintains the mathematical accuracy and depth without bogging the reader down with technical derivation of formulae. At the same time, it is written by a trader whose experience in the real market compels him to constantly question the 'nice' assumptions used to derive these formulae.

Taleb is first a market practitioner who uses models and pricing formulae to enhance trading and not the other way around. If there is a discrepancy between theory and reality he doesn't blame the markets.

The book is very personal and leaves no doubt what the author's opinion is on VAR, continuous hedging and other sacred cows of modern finance. The debacle in the financial markets in 1998 and the apologetic excuses by famous traders and theoreticians indicates that there is more than a grain of truth in Taleb's skepticism.

The importance of this book is that whether one agrees or disagrees with Taleb, it forces the reader to question his basic assumptions and rethink common truths. The book is unique: it is stylish, philosophical, literary, and if one may say so of a hardcore financial book - it is very entertaining.