Derivative-security

"Someone told me that each equation I included in the book would halve the sales," said theoretical physicist Stephen Hawking in his landmark book, A BRIEF HISTORY OF TIME. "I therefore resolved not to have any equations at all." Such a philosophy seems to have been adopted by 47-year-old Don M. Chance, First Union Professor of Financial Risk Management at Virginia Tech in Blacksburg, Virginia. In his new book, ESSAYS IN DERIVATIVES, Chance prides himself on keeping derivatives simple. It's a "Strunk & White" approach to talking about derivatives, and it works well for him. Originally a collection of 41 easy-to-read essays that first appeared on the web under the heading, "Derivatives Research Unincorporated", the book now includes 70 essays written with only a minimal amount of mathematical equations. All of the essays, says Chance, were re-edited and purged of the informal tone they sometimes took with Internet surfers when it was only an e-book. The idea of writing a derivatives book for those who prefer words to equations (or should I say, those like myself who understand words but not equations) appears to bode well for Chance. The book is a breeze to read, but quite informative. The e-book has also grown in breadth since first appearing on the web. After all, when Chance sometimes failed to add additional essays on a regular basis to the first 20 he originally penned, a spew of phone calls and emails came from a growing cult of derivatives readers on the Internet. "I was beginning to feel like the Ann Landers of derivatives," notes Chance in the preface to his new book. Ann Landers he may be, but the book is better than just some free advice. It is solid information for the right price. And I recommend it.

I am just about done with my MBA, and I have to say this is must-have book for the shelf. I read it cover to cover and now I find myself going to it for quick reference. It is really comprehensive and very thorough. The language is not the usual dense "academese," and I am most thankful to have--set forth in three short essays toward the end of the book--the differences in option pricing theory. This is the best overview on option pricing I've read yet.

Any trader or "quant" that has experience in pricing electricity options will appreciate the knowledge contained in Dragana Pilipovic's Energy Risk. The hybrid or "split-personality" nature of energy prices is emphasized throughout the book and is summarized in her two-factor price mean-reverting model. The book's entire exposition from option pricing to risk management is solidly grounded to the first few chapters that introduce Pilipovic's modelling framework.

Although the technical implementation issues are barely described, the information in the first 5 chapter should allow any reasonably numerate analyst to kiss goodbye the ambiguity of double Black-Scholes option valuation in favor of a modelling framework that can be statistically parameterized. It is well known that multi-factor pricing models capture higher order moments in the distribution of commodity prices and a Pilipovic's two-factor model captures the significant high and low frequency information in time-series data. The model lends itself well to parameterization through econometric/statistical means even if some nonlinear estimation techniques are required. The importance of analyzing seasonality in energy markets using statistical techniques is also stressed. In these first chapters (and the Appendix of interest rate models) it is evident that Pilipovic's practical ideology combines the most important elements of equity and interest rate models to tackle energy pricing problems. Although, the fundamental mathematical details are often glossed over (you may need occasional access to Springer-Verlag or other more technical publications), the insights offered in the book will convince any quant of the appropriateness of multi-factor models for the energies.

Chapter 6 provides a very good discussion of volatility term structure and its relationship to mean reversion in prices. The nature of term structure of volatility is extended to two-dimensions ("the volatility matrix") in light of Pilipovic's two-factor framework. There is no doubt that the phrase "volatility surface" is being heard just as much a "volatility curve" in today's trading environment. More mathematically inclined readers will recognize the concepts of serial auto-correlation and conditional volatility inherent in energy price processes although the exposition in the book is really practical.

Chapters 7 and 8 at least provide a decent overview of option pricing; but to make the information dangerous, the reader will likely have to pull his or her copies of Wilmott and Hull off the shelf. The discussion of tree methodologies gives the reader just enough information to wet his appetitite and start re-coding those simple binomial models. The jump to trinomial techniques is not well described but because its there the analyst knows its importance (just see Hull).

Introductory information on option greeks, risk mangement, and portfolio analysis is contained in Chapters 9 to 11. Non-detailed but interesting material includes hedging with different duration contracts, return/risk and minimum variance portfolio objectives. The book has numerous typos but corrections are easily obtained either through the publisher or the author herself. The folks at Sava (Pilipovic's Risk Management shop) are even friendly enough to discuss certain aspects of the technical material contained in the book

Dragana's book is a tremendous reference tool for anyone in the energy risk management field. Ms. Pilpovic not only makes this difficult subject easy for the reader, she also provides the detailed math behind the theories. This book was very helpful for both developing our internal risk management systems, as well as describing those systems to regulatory agencies.

I work in the energy products/generation industry and thought this will help explain what the whole energy-risk field is about. I'm still as confused now as I was before I bought the book .. probably because I dont have a strong background in computational finance. This is defintely not for newcomers and is really geared to the quants.

This book is the first that I have seen tackling the newer commodity markets of weather, emissions, bandwidth and coal trading. It is easy to read and quite informative. Peter Fusaro has assembled the leading practioners from the global energy trading community to offer their insights into these emerging markets. Moreover, software solutions, European gas trading, electronic energy trading and iondex construction are explained simply and clearly for the laymen. It's a must buy if you want to get up to speed fast in these rapidly changing markets which are now more important than ever due to the Enron financial meltdown.