Reviews
The first history of derivatives
Author: Hull, John
Source: Quantitative Finance, Volume 2, Number 2, April 2002, pp. 88-88(1)
Publisher: Routledge, part of the Taylor & Francis Group
> Original article available in pdf format (read)
It is very appropriate that the first history of derivatives should be written bythe father-and-son team, Phelim and Feidhlim Boyle. As most people in the
industry know, Phelim Boyle pioneered the use of Monte Carlo simulation to
value derivatives in the 1970s and has produced a steady stream of high
quality research since then. Feidhlim Boyle represents the new generation of
bright young derivatives practitioners. He recently obtained his MBA from a
top U.S. school and now works for Goldman Sachs in New York.
The book covers the products, the people, the events, and the research
ideas that have shaped the derivatives industry. There are many fascinating
insights. For example, the discussion of portfolio insurance at the time of the
October 19, 1987 crash reveals that not all portfolio insurers fared badly; the
discussion of the discovery of the Black-Scholes-Merton formula reveals just
how close some other academics (and practitioners) were to getting credit
for the formula; the discussion of hedging includes a detailed account of
what Microsoft does (based on the information in Microsoft's financial
statements); the debate on accounting for executive stock options presents
both sides of the argument in a thoughtful way; the chapter on derivative
disasters provides perspectives on the Orange County, Barings, and Long-
Term Capital Management fiascos; the chapter on credit risk explains the
growing popularity of credit derivatives and how they are structured.
In addition to being a history of derivative markets the book gently educates
the reader about what derivatives are, how they are priced, and how they
are used. Amazingly, it manages to do this almost no mathematics. It occurs
to me that the book would be ideal for many senior managers and directors
of companies who need to acquire an understanding of the derivatives
business without getting bogged down in technicalities. The first chapter
explains how contracts such as forwards, options, and swaps are used to
transfer risk. The second chapter while explaining the reasons for the
growth of derivatives markets includes material on how products such as
digital options, straddles, lookback options, Asian options, barrier options,
spread options, and basket options work. The third chapter, using a
bookmaker analogy, explains why there no free lunches. The fourth chapter
covers pricing by replication. The fifth chapter explains the Black-Scholes-
Merton formula. The sixth chapter covers hedging by corporations and
financial institutions using examples from the gold-mining, computer
software, and insurance industries. The seventh chapter deals with the way
investors use derivatives and shows how derivatives can be used to
manage investment returns. The eighth covers three famous derivatives
disasters. The ninth covers credit risk. The tenth is an overview of the "tools
of the trade".
In summary, the book is a great read for those in the derivatives business. It
is perfect for senior managers and directors who need a non-technical
understanding of what derivatives are all about.
-------------------------------------------
John C. Hull is a Professor of Derivatives and Risk Management at the
University of Toronto.
Unusually, he is both a very well respected researcher in the academic field
of quantitative finance (see for example the Hull-White model), and also the
author of (among other works) two books on financial derivatives that have
become market practitioners' standard texts: "Options, Futures, and Other
Derivatives" and "Fundamentals of Futures and Options Markets".
He currently holds associate editorship of the Journal of Derivatives (since
1993), The Review of Derivatives Research (since 1993), the Journal of
Derivatives Use, Trading & Regulation (since 1994), the Canadian Journal of
Administrative Studies (since 1996), the Journal of Risk (since 1998), the
Journal of Bond Trading and Management (since 2001), the Journal of
Derivatives Accounting (since 2002) and the Journal of Credit Risk (since
2004).
He studied Mathematics in Cambridge University, and holds an M.A. in
Operational Research from Lancaster University and a Ph.D. in Finance from
Cranfield University.
 | John Hull | |
| Harvard Business School | |
| Journal of Finance | |
| Swiss Derivatives Review | |
| The Actuary Magazine Review | |
| North American Actuarial Journal |
The first history of derivatives
Author: Hull, John
Source: Quantitative Finance, Volume 2, Number 2, April 2002, pp. 88-88(1)
Publisher: Routledge, part of the Taylor & Francis Group
> Original article available in pdf format (read)
It is very appropriate that the first history of derivatives should be written by
industry know, Phelim Boyle pioneered the use of Monte Carlo simulation to
value derivatives in the 1970s and has produced a steady stream of high
quality research since then. Feidhlim Boyle represents the new generation of
bright young derivatives practitioners. He recently obtained his MBA from a
top U.S. school and now works for Goldman Sachs in New York.
The book covers the products, the people, the events, and the research
ideas that have shaped the derivatives industry. There are many fascinating
insights. For example, the discussion of portfolio insurance at the time of the
October 19, 1987 crash reveals that not all portfolio insurers fared badly; the
discussion of the discovery of the Black-Scholes-Merton formula reveals just
how close some other academics (and practitioners) were to getting credit
for the formula; the discussion of hedging includes a detailed account of
what Microsoft does (based on the information in Microsoft's financial
statements); the debate on accounting for executive stock options presents
both sides of the argument in a thoughtful way; the chapter on derivative
disasters provides perspectives on the Orange County, Barings, and Long-
Term Capital Management fiascos; the chapter on credit risk explains the
growing popularity of credit derivatives and how they are structured.
In addition to being a history of derivative markets the book gently educates
the reader about what derivatives are, how they are priced, and how they
are used. Amazingly, it manages to do this almost no mathematics. It occurs
to me that the book would be ideal for many senior managers and directors
of companies who need to acquire an understanding of the derivatives
business without getting bogged down in technicalities. The first chapter
explains how contracts such as forwards, options, and swaps are used to
transfer risk. The second chapter while explaining the reasons for the
growth of derivatives markets includes material on how products such as
digital options, straddles, lookback options, Asian options, barrier options,
spread options, and basket options work. The third chapter, using a
bookmaker analogy, explains why there no free lunches. The fourth chapter
covers pricing by replication. The fifth chapter explains the Black-Scholes-
Merton formula. The sixth chapter covers hedging by corporations and
financial institutions using examples from the gold-mining, computer
software, and insurance industries. The seventh chapter deals with the way
investors use derivatives and shows how derivatives can be used to
manage investment returns. The eighth covers three famous derivatives
disasters. The ninth covers credit risk. The tenth is an overview of the "tools
of the trade".
In summary, the book is a great read for those in the derivatives business. It
is perfect for senior managers and directors who need a non-technical
understanding of what derivatives are all about.
-------------------------------------------
John C. Hull is a Professor of Derivatives and Risk Management at the
University of Toronto.
Unusually, he is both a very well respected researcher in the academic field
of quantitative finance (see for example the Hull-White model), and also the
author of (among other works) two books on financial derivatives that have
become market practitioners' standard texts: "Options, Futures, and Other
Derivatives" and "Fundamentals of Futures and Options Markets".
He currently holds associate editorship of the Journal of Derivatives (since
1993), The Review of Derivatives Research (since 1993), the Journal of
Derivatives Use, Trading & Regulation (since 1994), the Canadian Journal of
Administrative Studies (since 1996), the Journal of Risk (since 1998), the
Journal of Bond Trading and Management (since 2001), the Journal of
Derivatives Accounting (since 2002) and the Journal of Credit Risk (since
2004).
He studied Mathematics in Cambridge University, and holds an M.A. in
Operational Research from Lancaster University and a Ph.D. in Finance from
Cranfield University.
info@thederivativesbook.com
Derivatives: The Tools That Changed Finance
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