Reviews
The Actuary Magazine Review
by Leon Jones
An 'unintimidating' introduction to derivatives
PHELIM BOYLE HAS WORKED in the field of derivatives for some yearsand has put his name to more than a few papers on the subject. So you
might be forgiven for assuming that this book is going to be a technical
guide aimed at the specialist or a detailed account of academic
developments over the years. It is neither. Far from it, the father-and-
son team of Phelim and Feidhlim Boyle have instead set out to bring the
world of derivatives to a more general audience. No small task when one
considers the ratio of fact to fiction found in typical media coverage of
the subject, and the relatively low level of under-standing found in the
average finance worker. The Boyles should be applauded, first for
attempting to demystify and defend derivatives, and second for
managing to pull it off.
Minimum tricky mathematics
Throughout the book they are careful to keep formulae and tricky
mathematics to an absolute minimum. That's not to say they are guilty
of dumbing down. All the important ideas are covered, but by the use of
easy-to-grasp illustrations and real-life examples. The no-arbitrage
principle is illustrated with a Hingis-Williams tennis match. The merit of
forward contracts is shown through real examples from the power
generating industry. Microsoft's management of its overseas businesses
forms the basis for a discussion of currency swaps. The list goes on.
Disasters
All very useful reading for the derivative novice - but what's in this book
for the typical actuarial reader who (thinks he) knows the basics? He
might be tempted to head straight for the later sections with such
enticing titles as 'Chapter 8: Disasters'. Here we find concise analyses of
the usual derivative suspects. Nick Leeson's sinking of Barings Bank, the
rise and plummet of Long-Term Capital Management, and the bankrupting
of Orange County in California are all put under the spotlight.
Unsurprisingly, the conclusion drawn is that these fiascos were not
caused by derivatives per se, rather they were the result of 'star
performers' being allowed to take on ever more risky positions without
proper checks being made.
The quest
Another chapter gives a fine historical account of the quest for the
option pricing formula. How many actuaries are aware of the work of
Frenchman Louis Bachelier? I know I wasn't. Yet over 100 years ago he
completed a thesis in which he demonstrated a clear under-standing of
the no-arbitrage principle and had gone some way towards arriving at an
option pricing formula, only to have his work sit, untouched, in a Paris
library for 50 years.
I found this book well worth a read. It's unlikely to break new ground for
most actuarial readers but then that isn't what it's trying to do. What it
does attempt, and achieve, is an unintimidating introduction to
derivatives explaining their uses, highlighting the risks, and providing
plenty of background and context. Next time you hear someone say, 'I
don't know much about derivatives, but aren't they really dangerous?'
you could do a lot worse than recommend this book to them.
The Actuary is the official publication of the actuarial profession in the
United Kingdom, published in London by the Staple Inn Actuarial Society.
 | John Hull | |
| Harvard Business School | |
| Journal of Finance | |
| Swiss Derivatives Review | |
| The Actuary Magazine Review | |
| North American Actuarial Journal |
The Actuary Magazine Review
by Leon Jones
An 'unintimidating' introduction to derivatives
PHELIM BOYLE HAS WORKED in the field of derivatives for some years
might be forgiven for assuming that this book is going to be a technical
guide aimed at the specialist or a detailed account of academic
developments over the years. It is neither. Far from it, the father-and-
son team of Phelim and Feidhlim Boyle have instead set out to bring the
world of derivatives to a more general audience. No small task when one
considers the ratio of fact to fiction found in typical media coverage of
the subject, and the relatively low level of under-standing found in the
average finance worker. The Boyles should be applauded, first for
attempting to demystify and defend derivatives, and second for
managing to pull it off.
Minimum tricky mathematics
Throughout the book they are careful to keep formulae and tricky
mathematics to an absolute minimum. That's not to say they are guilty
of dumbing down. All the important ideas are covered, but by the use of
easy-to-grasp illustrations and real-life examples. The no-arbitrage
principle is illustrated with a Hingis-Williams tennis match. The merit of
forward contracts is shown through real examples from the power
generating industry. Microsoft's management of its overseas businesses
forms the basis for a discussion of currency swaps. The list goes on.
Disasters
All very useful reading for the derivative novice - but what's in this book
for the typical actuarial reader who (thinks he) knows the basics? He
might be tempted to head straight for the later sections with such
enticing titles as 'Chapter 8: Disasters'. Here we find concise analyses of
the usual derivative suspects. Nick Leeson's sinking of Barings Bank, the
rise and plummet of Long-Term Capital Management, and the bankrupting
of Orange County in California are all put under the spotlight.
Unsurprisingly, the conclusion drawn is that these fiascos were not
caused by derivatives per se, rather they were the result of 'star
performers' being allowed to take on ever more risky positions without
proper checks being made.
The quest
Another chapter gives a fine historical account of the quest for the
option pricing formula. How many actuaries are aware of the work of
Frenchman Louis Bachelier? I know I wasn't. Yet over 100 years ago he
completed a thesis in which he demonstrated a clear under-standing of
the no-arbitrage principle and had gone some way towards arriving at an
option pricing formula, only to have his work sit, untouched, in a Paris
library for 50 years.
I found this book well worth a read. It's unlikely to break new ground for
most actuarial readers but then that isn't what it's trying to do. What it
does attempt, and achieve, is an unintimidating introduction to
derivatives explaining their uses, highlighting the risks, and providing
plenty of background and context. Next time you hear someone say, 'I
don't know much about derivatives, but aren't they really dangerous?'
you could do a lot worse than recommend this book to them.
The Actuary is the official publication of the actuarial profession in the
United Kingdom, published in London by the Staple Inn Actuarial Society.
info@thederivativesbook.com
Derivatives: The Tools That Changed Finance
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