Derivative products

Two encyclopedic references, one mainly theoretical and one practical:

  • Options, Futures, & Other Derivatives
    By John C. Hull. 7th edition. Prentice Hall, 2009. A well-known textbook for graduate and advanced undergraduate courses in business, economics and financial engineering. Theoretical yet accessible treatment of measurement and modeling contributions. Assumes the reader has taken an introductory course in finance, probability and statistics, but presumes no prior knowledge of swaps or other derivatives.
  • Swaps/Financial Derivatives
    By Satyajit Das. 3d edition, 4 Volumes. Wiley, 2004. Encyclopedic work that brings together all aspects of derivative instruments including: design, pricing, valuation, trading; management of market, credit and other risks; documentation, accounting, taxation, applications of derivatives, and others. The approach is practical rather then theoretical. Includes coverage of all types of derivatives, including credit, equity, and commodity derivatives.

Other useful references:

  • Managing Financial Risk
    By Charles W. Smithson. 3d edition. McGraw-Hill, 1998. Provides explanations of forwards, futures, swaps, options and 'exotic' derivatives - why and how they are used and how they are managed. Because it seeks to explain complicated contracts in elementary terms, the book is popular as a training text for derivatives professionals.
  • Financial Engineering
    By Lawrence C. Galitz. Irwin, 1995. Intermediate level description of futures and OTC swaps and options, aimed more at practitioners than academics. Particularly useful are the chapters on swap pricing and on option pricing.
  • Swaps and Other Derivatives
    By Richard Flavell. Wiley, 2002. Detailed guide to the pricing and valuation of the most common types of swaps and options. The book is oriented entirely toward implementation, and contains detailed recipes for setting up spreadsheets for products ranging from FRAs and short-term swaps to interest rate caps, floors, and swaptions. The book differs from most others in its avoidance of abstract theory and advanced mathematics in favor of practical implementations of models.
  • Option Volatility and Pricing
    By Sheldon Natenberg. Probus, 1995. Practitioner-oriented book on option trading strategies and volatility concepts. Avoids complex mathematics.
  • Options Markets
    By J. Cox and M. Rubinstein. Prentice-Hall, 1985. Classic description of option markets and pricing by the developers of the binomial model.

Counterparty credit risk

In addition to the Das, Hull, and Smithson books mentioned above, the following include helpful discussions of counterparty credit risk:

  • Counterparty Risk Management Policy Group
    The CRMPG, consisting of representatives from major derivatives dealers as well as buy-side firms, has issued a series of reports containing recommendations on how to improve the management of counterparty credit risk.  
  • BankOne Case, Regarding Market Value of Swaps
    Court decision includes overview of OTC derivatives markets.  Expert report contains useful discussion of credit valuation adjustment of derivatives values for counterparty credit risk. 
  • Derivatives Credit Risk
    Edited by Robert Jameson. Risk Books, 1995.  Collection of articles discussing measurement and management issues.

Credit derivatives and synthetic securitization

  • Credit Derivatives: An Overview
    By David Mengle. Federal Reserve Bank of Atlanta, Economic Review, Fourth Quarter 2007.  Basic introduction to credit default swaps, presented by ISDA to the Atlanta Fed’s 2007 Financial Markets Conference, “Credit Derivatives: Where’s the Risk?
  • Structured Credit Products
    By Moorad Choudry. Wiley, 2004. Practitioner-oriented introduction to funded and unfunded credit derivatives and to synthetic securitization. Innovative features of book include descriptions of Bloomberg credit derivatives and asset swap screens; accessible treatment of credit derivative pricing; and extensive descriptions of a wide variety of synthetic securitization structures.
  • Credit Derivatives
    By Geoff Chaplin. Wiley, 2005. Comprehensive practitioner-oriented coverage of single name and portfolio credit derivatives, including overview of documentation.  The author presents a basic credit derivative pricing model and then applies the model to a wide variety of credit default swap structures.  The book also covers such topics as recoveries and correlation.
  • Credit Derivatives, CDOs, and Structured Products
    By Satyajit Das. 3d edition. Wiley, 2005. Detailed reference work on credit derivative, credit-linked note, and synthetic securitization structures and applications. Third edition includes coverage of innovations such as credit index products and CDS swaptions.
  • Credit Derivatives and Synthetic Structures
    By Janet M. Tavakoli. 2d edition. Wiley, 2001. Describes common and exotic credit derivatives as well as synthetic securitizations. Strongest sections are on total return swaps and their use by hedge funds.
  • Collateralized Debt Obligations and Structured Finance
    By Janet M. Tavakoli. Wiley, 2003. Comprehensive description of cash and synthetic securitization structures, both arbitrage and balance sheet. The book appears to be aimed at educating investors as to the risks involved with securitization structures and at increasing investors’ ability to perform due diligence. Interesting discussion of super-senior tranches.
  • Credit Derivatives Pricing Models
    By Philipp Schönbucher. Wiley, 2003. Advanced, primarily theoretical treatment of standard approaches to credit derivatives modeling. The book begins with descriptions of hedge- and bond-based pricing methods, and then moves on to more advanced methods such as intensity-based models, recovery modeling, and default correlation. Requires background in mathematical finance.

Commodity derivatives and risk management

  • Commodity Derivatives: Markets and Applications
    By Neil Schofield. Wiley, 2007.  Brief treatment of products in general, followed by useful discussion of a wide range of underlying commodity markets.
  • Commodities and Commodity Derivatives
    By Helyette Geman. Wiley, 2005. First half of book contains a mainly theoretical treatment of commodity spot and forward prices and commodity option pricing. Second half of book contains useful chapters on underlying markets such as oil, natural gas, and electricity. The book is oriented mainly toward exchange-traded derivatives (futures), with little explicit coverage of issues associated with over-the-counter commodity derivatives.
  • Energy Risk: Valuing and Managing Energy Derivatives
    By Dragana Pilipovic. McGraw-Hill, 1998. Primarily aimed at quants, the book is a technical analysis of how the behavior of energy prices causes energy derivatives to behave differently from interest rate or equity derivatives.

Derivatives documentation and collateral management

  • Derivatives Law and Practice
    By Simon Firth, Sweet & Maxwell 2005. This book provides a comprehensive legal and regulatory guide in looseleaf format to the spectrum of derivative instruments and their associated documentation. In addition, it covers issues such as taxation, related litigation and regulatory capital treatment of derivatives, and is updated every six months to remain abreast of new developments. A strong practical emphasis is maintained with guidance on the main techniques.
  • Documentation for Derivatives
    By Anthony C. Gooch and Linda B. Klein, Euromoney, 2002. The fourth edition updates the 1993 edition and reflects the most recent developments on derivatives documentation. Volume 1 explores the main legal issues relating to derivatives and examines U.S. commodities and securities laws. Volume 2 presents a detailed examination of the ISDA Master Agreements and Credit Support Documentation, as well as offering material on cross-product risk management.
  • Mastering the ISDA Master Agreements (1992 and 2002): A Practical Guide for Negotiation
    By Paul C. Harding, Financial Times -Prentice Hall 2010. This book updates the same author's Mastering the ISDA Master Agreement published in 2001 and Mastering the ISDA Master Agreements (1992 and 2002): A Practical Guide for Negotiation published in 2003. It offers detailed and practical guidance on negotiating both the 1992 and 2002 ISDA Master Agreements. It provides new entrants to derivatives documentation with practical negotiation information. There are concise summaries of each section of the Agreement and examples of schedule elements for special entities. There are also chapters devoted to legal, credit and operational issues.
  • A Practical Guide to the 2003 ISDA Credit Derivatives Definitions
    By Paul C. Harding, Euromoney Books 2004. This book provides a user-friendly guide to the 2003 ISDA Credit Derivatives Definitions for both market practitioners and those new to credit derivatives documentation. It has section-by-section commentary on the Definitions and chapters on the main credit derivatives products and risks associated with them, legal issues and recent developments in credit derivatives documentation.
  • The Law on Financial Derivatives
    By Alastair Hudson, Sweet & Maxwell, 2002. The third edition presents analysis of the law relating to the use of financial derivatives and examines other areas of law, such as contract, tort, and trusts, which relate to financial derivatives.
  • The Guide to Using and Negotiating OTC Derivatives Documentation
    By Christian A. Johnson, 2005, Institutional Investor Books. This book offers an informational overview on the preparation of the ISDA Master Agreement and examines the critical provisions of both the 1992 and the 2002 Master Agreement, such as Sections 5 and 6, in greater detail. The book also examines key collateral and international tax withholding issues.
  • Mastering Collateral Management and Documentation
    By Paul C. Harding and Christian A. Johnson, FT/Prentice Hall, 2002. Provides a detailed introduction to collateral management and documentation. Offers practical guidance on ISDA Credit Support Documentation and describes, through screen-based examples, the collateral management process.
  • Collateral
    By Richard Potok. Butterworths, 2002. Provides detailed information on conflict of laws issues relating to indirectly held securities and examines jurisdictional approaches and, in some cases, deficiencies, in 24 jurisdictions.

Risk management

  • Risk Management
    By Michel Crouhy, Dan Galai and Robert Mark. McGraw-Hill, 2000. Encyclopedic description of risk management issues, including policy, methodology, technological infrastructure, data, and investment and hedging strategies.
  • Managing Derivative Risks
    By Lillian Chew. Wiley, 1996. Dissects risk management problems from the 1990s (Barings, Metallgesellschaft, and Orange County) and describes risks managed by swaps dealers. Highly recommended treatment of basis risks and risks associated with options.
  • Value at Risk
    By Philippe Jorion. 2d edition. McGraw-Hill, 2001. Comprehensive description of methodological and implementation issues surrounding Value at Risk
  • Quantitative Finance
    By Paul Wilmott. Wiley, 2000. A guide to pricing and risk management for the usual (and less usual) types of derivatives. Clear, easy to follow presentation. Not too heavy on the quantitative side.
  • Risk Management: A History
    Risk books, 2003. Contains chapters describing the major historical developments in the derivatives industry and financial risk management. In addition, it features articles by some of the leading contributors to the financial theories underlying risk management. Published in celebration of the 15th anniversary of Risk magazine.
  • Market Models
    By Carol Alexander. ISMA Centre, 2001. A complete description of financial models used by risk managers to measure market risk.
  • Dynamic Hedging
    By Nassim Taleb. Wiley, 1997. Controversial, opinionated effort by an experienced and knowledgeable trader to bridge gap between options theory and practice. The author is well known for his skepticism regarding how Value at Risk and other quantitative tools perform in real world markets. Advanced book, not aimed at beginners.
  • The Risk Management Process
    By Christopher Culp. Wiley, 2001. Not primarily a book on risk measurement, although it does contain chapters on the subject. Instead, it shows the role risk management can play in corporate finance and strategy. Intended audience is senior management and directors interested in a 'big picture' view of the role of risk management.

Credit risk measurement and management

  • Credit Portfolio Management
    By Charles W. Smithson. Wiley, 2003. Accessible description of state of the art in credit risk management. Includes chapters describing credit portfolio modeling, data requirements, credit derivatives and securitization, and economic capital allocation.
  • Internal Credit Risk Models
    By Michael K. Ong. Risk Books, 1999. Describes capital regulation and credit risk modeling. Includes chapters on each element of credit modeling, including probability of default, expected and unexpected loss, portfolio effects, and so on. Begins with an interesting account of the inadequacies of the 1988 Basel Capital Accord and the resulting distortions.
  • Managing Bank Capital
    By Chris Matten. 2d edition. Wiley, 2000. Analyses bank capital from the point of view of the treasurer, regulator, risk manager, and shareholder. Focuses more on techniques than on theory. Includes discussions of risk-adjusted performance measurement, capital allocation, and economic profit measurement.
  • Credit Risk Management
    By John B. Caouette, Edward I. Altman, and Paul Narayanan. Wiley, 1998. Describes tools and techniques available for managing credit risk, spanning both classical credit analysis and modern quantitative finance. The book gives an overview of the wide range of models available, both for retail and large credits. A notable contribution is the discussion of the practical challenges of modeling credit risk, including data availability and measurement problems.
  • Credit Risk Measurement
    By Anthony Saunders. Wiley, 1999. Introduction to alternative methods for modeling credit risk.
  • Credit: The Complete Guide to Pricing, Hedging and Risk Management
    By Angelo Arvanitis and Jon Gregory. Risk Books, 2001. Provides a comprehensive description of credit risk measurement, pricing, hedging, and risk management.
  • Counterparty Risk Management Policy Group
    The CRMPG, consisting of representatives from major derivatives dealers as well as buy-side firms, has issued a series of reports containing recommendations on how to improve the management of counterparty credit risk.  

Public policy issues

  • Corporate Aftershock: The Public Policy Lessons from the Collapse of Enron and Other Major Corporations
    Edited by Christopher L. Culp and William A. Niskanen. Wiley, 2003. A public policy analysis of the implications of the Enron failure, with the stated objective of discouraging regulatory and legislative overreaction. Includes chapters on corporate governance, derivatives regulation, accounting and disclosure, structured finance, energy trading, and credit risk management.

The Bibliography of Educational Resources is by no means exhaustive: the books on the list are drawn from those that have been consulted by or are known to members of the ISDA staff.

ISDA will only post descriptions of books that have been reviewed by ISDA staff. No endorsement by ISDA is meant or implied in the suggestions. Absence of a book from the above list should not be interpreted as a negative comment.

Because of the wide range of books available and coming to market, we suggest that interested readers consult such sources as libraries, financial publishers and the Internet for information on the hundreds of additional titles that are available.