Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options (Second Edition)
Book Details
- Author: Andrew M. Chisholm
- Categories: Derivatives, Options, Futures & Commodities
Quick Summary
Andrew Chisholm provides an accessible yet rigorous introduction to derivative instruments, systematically explaining the mechanics, pricing, and applications of forwards, futures, swaps, and options with step-by-step examples designed for finance professionals and students.
Detailed Summary
"Derivatives Demystified" by Andrew M. Chisholm, published by John Wiley & Sons in its second edition in 2010, is a pedagogically structured introduction to the major classes of derivative financial instruments. The book is designed to make derivatives accessible to readers without advanced mathematical backgrounds while maintaining sufficient rigor for professional application.
The text opens with the origins and growth of the derivatives market, providing historical context for why these instruments were developed and how the market has evolved into a multi-trillion-dollar global ecosystem. This foundation helps readers understand the economic functions that derivatives serve: risk transfer, price discovery, and market completion.
The forward and futures chapters cover the mechanics of these instruments, including contract specification, the cost-of-carry pricing model, margin and marking-to-market, basis risk, and hedging applications. Chisholm distinguishes between the OTC forward market and the exchange-traded futures market, explaining when each is appropriate.
The swaps section covers interest rate swaps, currency swaps, and equity swaps, explaining how these instruments allow counterparties to transform their exposure profiles. Pricing is presented through the present value of expected cash flows framework, with step-by-step numerical examples.
The options portion of the book covers the full spectrum from basic call and put mechanics through put-call parity, the Black-Scholes model (presented intuitively rather than through derivation), the Greeks (delta, gamma, theta, vega), and basic options strategies including spreads, straddles, and strangles. The second edition incorporates developments in credit derivatives, structured products, and the lessons learned from the 2008 financial crisis regarding counterparty risk and the systemic implications of derivatives markets.
As Joseph Schumpeter is quoted in the dedication: "Profit attaches to the creation of new things, to the realisation of the future value system" -- a fitting philosophical frame for a book about instruments that derive their value from future states of the world.
