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Derivatives Markets, 2/E
Robert L. McDonald, Northwestern University

ISBN-10: 032128030X
ISBN-13: 9780321280305

Publisher: Prentice Hall
Copyright: 2006
Format: Cloth; 912 pp
Published: 12/15/2005

Suggested retail price: $180.00
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To be financially literate in today’s market, business students must have a solid understanding of derivatives concepts and instruments and the uses of those instruments in corporations.  The Second Edition has an accessible mathematical presentation, and more importantly, helps students gain intuition by linking theories and concepts together with an engaging narrative that emphasizes the core economic principles underlying the pricing and uses of derivatives.

  • Concrete Applications complement the pricing discussions. Chapters on financial engineering, corporate applications, and real options all address practical problems.
  • An emphasis on core economic principles helps students develop a deeper, more intuitive understanding of derivatives markets and instruments.  For example, the idea that options are a form of insurance is presented at the outset.
  • Integrated treatment of forward contracts and options. The initial chapters cover both forwards and options, illustrating how they are used and incorporating an extended example of hedging by gold-mining and gold-buying firms. This approach helps to unify option pricing; in particular, it makes it clear that the formula for pricing stock options is the same as the formula for pricing currency options.
  • Formulas are motivated, placed in context, and explained intuitively. The goal is to help students build intuition about pricing models through their applications so they can know when a price does not make sense and why. The author provides the student with a framework for thinking about commonality among various derivative instruments.
  • The Theme of Applied Computation is emphasized.  Using the pre-programmed Excel spreadsheets that are packaged with the book, students can become more comfortable and fluent with pricing models and their use in spreadsheets, even before they understand the precise mathematical underpinnings.

  • A new chapter on Credit Risk examines the burgeoning market in credit default swaps and related products.
  • A new chapter on Volatility covers volatility estimation, hedging and pricing options with stochastic volatility.
  • An all-new problems book with solutions for every chapter is available to supplement problems in the book.
  • Enhanced option pricing software.
  • A case book is available for instructors who wish to incorporate cases in their teaching. Choose to package McDonald’s text with the well-respected Risk Takers: Uses and Abuses of Financial Derivatives by John Marthinsen. Risk Takers profiles seven real-life situations in which financial derivatives resulted in fabulous success or spectacular failure while also exploring some everyday uses of derivatives, such as stock options. Beyond simple case studies, this book fully explores the events, providing context and discussing outcomes.

 

Chapter 1  Introduction to Derivatives

 

Part I  Insurance, Hedging, and Simple Strategies

 

Chapter 2  An Introduction to Forwards and Options

 

Chapter 3  Insurance, Collars, and Other Strategies

 

Chapter 4  Introduction to Risk Management

 

Part II  Forwards, Futures, and Swaps

 

Chapter 5  Financial Forwards and Futures

 

Chapter 6  Commodity Forwards and Futures

 

Chapter 7  Interest Rates Forwards and Futures

 

Chapter 8  Swaps

Part III  Options

Chapter 9  Parity and Other Option Relationships

 

Chapter 10  Binomial Option Pricing: I

 

Chapter 11  Binomial Option Pricing: II

 

Chapter 12  The Black-Scholes Formula

 

Chapter 13  Market-Making and Delta-Hedging

 

Chapter 14  Exotic Options: I

Part IV  Financial Engineering and Applications

 Chapter 15  Financial Engineering and Security Design

 

Chapter 16  Corporate Applications

 

Chapter 17  Real Options

 

Part V   Advanced Pricing Theory

 

Chapter 18  The Lognormal Distribution

 

Chapter 19  Monte Carlo Valuation

 

Chapter 20  Brownian Motion and Ito’s Lemma

 

Chapter 21  The Black-Scholes Equation

 

Chapter 22  Exotic Options:  II

 

Chapter 23  Interest Rate Models

 

Chapter 24  Risk Assessment

 

Chapter 25  Credit Risk

 

Chapter 26  Volatility

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