# Book Review: 'Derivatives - Principles and Practice,' by Rangarajan K. Sundaram and Sanjiv R. Das

If until now I focused my readings on application-oriented stuff on technical analysis, with Derivatives - Principles and Practice” my lectures have taken a 360-degree turn. McGraw-Hill Professional is well known for publishing as-academic-as-possible books in the finance area (and not only). I used to study some of their books for my MBA and I knew that they are in a different class from the usual text.

So, if you are used to books which focus on stories and on easy to understand graphics, Derivatives- Principles and Practice is much more complex for several reasons.

First of all, this is an academic book written with motivated and well-informed students in mind. Although the authors specify that you need to know only high-school mathematics and that everything else is within the covers of the book, it might be very hard for the reader to progress if he/she does not grasp well the basic mathematical concepts. After all, this is a book on derivatives – which represent one of the most complex financial subject on planet Earth.

Secondly, the book focuses nicely on all the main topics in the field. It can be thus used as a full reference in the complex finance area, making it one of the few volumes on library shelves that is so complete. Just have a look at the topic list:

1. Futures and Forwards
2. Options
3. Swaps
4. Interest Rate Modeling
5. Credit Risk
6. Computation

As with any Mc Graw Hill Professional book, this one comes fully loaded with detailed explanations and case studies. In the beginning, the sheer volume of material in the book can be overwhelming, but after a few chapters I realized that it is just the complexity of the field that drives this.

As a practitioner in the trading field, I appreciated very well how nicely and logically the modeling of the swaps or the options is laid out here. We often use quite complicated models without understanding what is behind them. Derivatives - Principles and Practice manages to offer a complete overview on some hot topics. And even if it looks a bit too deep, it is just because it tries to spell it all out here, as any normal academic book should do...

One of my favorite chapters of the book remains the one on the Black-Scholes Model, one of the most widely used models for explaining options pricing. I liked a lot the comment on how easy the model is implemented (it depends only on five variables and only one – volatility - is not directly observable). I knew that the model refers to arbitrage-free option prices but I did not knew its interesting applications in dynamic hedging. And the volatility testing of the options, once understood, can make a huge difference in any trader’s performance.

There are many more nice things within the book – for example, the corporate finance applications of swaps have developed huge new markets in the last 10 years or so. Derivatives - Principles and Practice can be a bit overwhelming in the beginning – but only until you get used to its rapid style and to the idea that you really need some knowledge before you start using advanced derivatives.

Enjoy reading it (and taking it back down from the shelf from time to time).

Disclosure: No position