A Course in Derivative Securities is truly a student text where theory and programing examples blend together well. Nevertheless, it is not really an introductory book as the title suggests. Concepts are explained prior to giving the theoretical spin but only in several paragraphs without some basic examples that generally mark an introductory book. It would be useful to cover the basic theory of option pricing and fixed income securities prior to taking on this book. For an advanced reader with a good working command of the concepts of financial derivatives this book will be an excellent companion.
The charm of the book is in the sample VBA code scattered throughout the text. The author provides a little appendix on the VBA programming covering only the most important aspects. For those more inclined to use other programming languages such as MATLAB, it will be easy to translate the code. There are many books on financial derivatives but hardly any that combine the theoretical exposition with the numerical. For this reason A Course in Derivative Securities is more than worthwhile.
The book is divided into three parts Introduction to Option Pricing, Advanced Option Pricing, and Fixed Income respectively. Introduction to Option Pricing covers basics of asset pricing that is generally found in almost any text on financial derivatives. Advanced Option Pricing goes a bit further. It covers basic principles of foreign exchange, forwards, futures, exchange options, and exotic options. A more detailed presentation is given on Monte Carlo and Binomial valuation followed by finite difference methods. The last part of the book covers fixed income. Chapter 11 and 12 give an introduction to fixed income securities where chapter 13 covers valuation. The final chapter of the book provides a very clean survey of the term structure models.
In addition to the VBA code provided there are also plenty of exercises after each chapter. It is nice to see that many of these exercises are not proof based but rather are based on numerical computation.
Ita Cirovic Donev is a PhD candidate at the University of Zagreb. She hold a Masters degree in statistics from Rice University. Her main research areas are in mathematical finance; more precisely, statistical mehods of credit and market risk. Apart from the academic work she does consulting work for financial institutions.
Part I Introduction to Option Pricing: Asset Pricing Basics. Continuous-Time Models. Black-Scholes. Estimating and Modelling Volatility. Introduction to Monte Carlo and Binomial Models.- Part II Advanced Option Pricing: Foreign Exchange.-Forward, Futures, and Exchange Options.-Exotic Options. More on Monte Carlo and Binomial Valuation. Finite Difference Methods.- Part III Fixed Income: Fixed Income Concepts. Introduction to Fixed Income Derivatives. Valuing Derivatives in the Extended Vasicek Model. A Brief Survey of Term Structure Models.- Appendix A: Programming in VBA.- Appendix B: Miscellaneous Facts about Continuous-Time Models.