Volatility and Correlation: The Perfect Hedger and the Fox: 278 (The Wiley Finance Series)

The book was highly recommended to me by a practitioner trader. But after 50 pages I see that the author has little knowledge of maths. Some formulas are incorrect (e.g. equation 2.43, ) some are given without any context (eq. 2.1). In many places author makes correct implications by using incorrect arguments (determinant reasoning after eq 2.33). Many formulas are just stated without explanation, reference or even context! This indicates that the author wants to back his reasoning with models and formulas from stochastic calculus but simply lacks experience in it and in writing scientific papers. I hope that the message he wants to convey is reasonable, but it is really difficult to verify its validity because of the huge number of errors and unclear explanation. As an extra - some sentences (in plain English, without formulas) are constructed with multiple negations so that it is really difficult to understand.Overall, even if the book is ok-ish for practical purposes as an general overview, it should not be used as a reference for the actual details and formulas.

Amazing book not confusing at all. ..beware it needs a good level of understanding of probability theory and measure theory

There are many books on financial modeling currently available and each has a different approach to presenting the subject matter. Some endeavor to present rigorous mathematical formalism and real-world practical examples are kept to a minimum or are completely absent. Others, and there are many of these, only sketch the mathematical details and present many (usually trivial) examples using software tools such as EXCEL or SAS. Then there are those books that attempt to explain in detail the intuition and meaning behind the concepts used in financial modeling, and never tire at giving readers the insight they need in order to become successful financial analysts/modelers. For reasons unknown, these books are rare, but when one comes across them they definitely stand apart from the others in terms of their high didactic quality. Reading these books is sheer pleasure, and no matter how high they are priced their readers are still getting a bargain.This book is one of these, and readers who want a sound treatment of the mathematical theory of options along with insightful motivations behind this theory should reserve some time to study it. And it is a book that should be read not only by those who want to enter into the field of financial engineering, but also by seasoned professionals who need this kind of insight, if only to be able to better explain the underlying concepts to administrators and managers. It could also be very useful to instructors in the many financial engineering departments throughout the world. Hundreds of millions of dollars are devoted to financial modeling at the present time, and this is only likely to increase in the years to come, despite the pronouncements of some who are skeptical as to its value, pointing to the current strains in the credit markets as proof of its inefficacy.Some examples of the clarity and insight that the author brings to his writing include the following:* The discussion of the notion of a risk-neutral measure and the resulting Girsanov's theorem. This is a topic that is usually treated cavalierly in most books on financial modeling, but in this one the author motivates it in the context of the replication of option payoff. The side constraint `the absence of arbitrage' guarantees a unique price for option, and the author begins his motivation by considering the familiar approach via partial differential equations. But after this discussion he believes that arriving at and understanding Girsanov's theorem is best done outside of the continuous time framework, due to the latter's complexity. His ensuing discussion, done in the binomial approximation, proves its didactic power, for the author outlines four different approaches to the evaluation of the fair price of a contingent claim. The fourth one on risk-neutral valuation is the key to his explanation of Girsanov's theorem. Along the way, the Radon-Nikodym derivative appears, and in a way that is much more understandable than merely stating it as a definition, as it typically the case in books on real analysis. In this book it appears when one considers "switching numeraires" and the author does a beautiful job in explaining how this is connected with the equivalence of measures and Girsanov's theorem.* More precise definitions of terms typically used in discussions on option pricing and general financial engineering and why this precision is necessary when engaging in financial modeling.* The discussion on the difference between hedging with spot transactions in equity forward contracts versus interest-rate forward contracts. This discussion is generalized from forward contracts to options on equity or FX forwards, and gives insight into the difference between the "Black" world and the "Black-Scholes" world and the complexity of hedging with interest-rate derivatives.* Detailed discussion and insights into the efficacy of hedging, in both the "real" and "risk-adjusted" contexts.* The discussion on the Crouhy-Galai argument as to the need for including both the total variance and the instantaneous volatility in obtaining an optimal hedge.Note: This review is based on a reading of four chapters of the book.

I have read this text from cover to cover twice. It is much easier to understand its organization the second time around. The reviewer who complained that it feels disjointed perhaps simply didn't connect with the key messages running through the book. Having assumed (incorrectly) that the intro chapters were a bunch of fluff typical of these texts, I glossed over the intro the first time around. You'll benefit greatly if you scan the book, then go re-read the intro. It's all there put together painstakingly by an author who must have spent an inordinate amount of care and effort trying to make his points clear.Another reviewer complains that it's verbose. Perhaps, but Rebonato really drives his points home by explaining the same thing from multiple angles and repeats himself at just the right points to keep you on the right track. I can see how somebody impatient can get annoyed by it, but if you are willing to invest time and read his prose - especially the intro chapters - carefully, the insight gained is definitely worth it. Not verbose at all in my view. Every paragraph has a purpose if you understand what he's trying to communicate.It's an advanced text. Don't waste your time if you just learned what a call option it. There are more relevant texts for you out there. You should also have covered basics of stochastic calculus (see Neftci for one). For somebody who has traded vol and wanted to go deeper this book is pure gold. I love it as much as I love Taleb's Dynamic Hedging, albeit Taleb is much less formal and rigorous. What's common betw the two is the depth of original insight relevant to a trader not typically found in the sea of literature on derivs.

Everyone knows that implied volatility is "the wrong number to put in the wrong formula to get the right price", but most books spend little (if any) time discussing the mismatch between model and reality. This work is basically centered on this mismatch and gives it a thorough reasoned treatment. It is truly a book for the practitioner.