Book Review: Option Pricing Formulas, and Derivatives - both by Espen Haug

by: David Merkel, CFA

This is not my ordinary book review. These are good books that will only appeal to a small fraction of my readers, because few will have need for the knowledge. Both are written by Espen Gaarder Haug, who is kind of a character. He collects option pricing formulas the way some people collect Barbie Dolls, Beanie Babies, or Baseball Cards. He has interacted with some of the brightest minds in the field, and collaborated with a few of them. In both books the math is significant — it would help if your calculus was sharp, and for any value some algebraic knowledge is needed.

Let’s start with the more esoteric of the two books, The Complete Guide To Option Pricing Formulas. Almost every option formula is included there, together with ways of estimating volatility, certain statistical techniques, aspects of compound interest math, etc. The book is very comprehensive, and for those that need how to estimate the value of standard and non-standard options, it is a good book to keep on hand as a reference, together with the free CD-ROM containing an Excel add-in that allows you to use the formulas inside Excel. I have used them for some of the insurance companies I have worked for; the software was easy and reliable.

The second book Derivatives, Models on Models, is different. He interviews 15 significant thinkers on options and derivatives, and presents 15 papers by them. Most of them contain tough math; some I couldn’t understand. The real value of the book was in the interviews, where many of the interviewees showed significant knowledge of the limitations of their models, and how derivatives were misunderstood by the public, or by their users.

There are quirky aspects to this book, including cartoons and photos that are somewhat self-aggrandizing to the author, but make the point in a humorous way. I liked both books, but only a modest fraction of my readers should have any interest here.

If you want it, you can find them here:

Derivatives Models on Models

The Complete Guide to Option Pricing Formulas

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