Financial Risk Management

Many of these books are recommended reading for the Global Association of Risk Professionals Financial Risk Manager designation.

Jorion, Philippe, Financial Risk Manager Handbook + Test Bank, December 2010, John Wiley & Sons, ISBN 0470904011

The main study guide for the Financial Risk Manager designation, certified by the Global Association of Risk Professionals. Philippe Jorion is one of the leading academics in the field of financial risk management. The book provides a structured framework for tackling the diverse set of study objectives, detailed explanations of each area, past exams and explanations for the answers. A good desk reference for the financial risk management practitioner, regardless of their intention to pursue the designation.

Wilmott, Paul, Derivatives: The Theory and Practice of Financial Engineering, November 1998, John Wiley & Sons, ISBN 0471983667

Paul Wilmott has been a leader in teaching practitioners about derivatives for many years. This book is any excellent compendium of a broad array of topics related to derivatives in an easy-to-understand format. What is particularly compelling about this book is the clarity with which Wilmott writes. Derivatives textbooks are all too often encumbered with language and mathematics seemingly designed to exclude a wider audience. Wilmott clearly understands the breadth of appeal of these products and the necessity for making the topic as accessible as possible.

Bernstein, Peter, Against the Gods: The Remarkable Story of Risk, September 1998, John Wiley & Sons, ISBN 0471295639.

Bernstein’s Against the Gods: The Untold Story of Risk is an excellent jumping-off point for individuals who are looking for the intellectual foundations of the contemporary revolution in financial engineering. Just as Carl Sagan’s Cosmos book (and television program) inspired many people by its intuitive explanation of the evolution of physics and astronomy, Bernstein endeavors to show how risk and the techniques for dealing with it are not novel but rather the culmination of thousands of years of thought and practice. Reading this book first provides the context for understanding the mathematics and the nuts and bolts of modern financial risk management.

Taleb, Nassim, Dynamic Hedging: Managing Vanilla and Exotic Options, December 1996, John Wiley & Sons, ISBN 0471152803.

Nassim Taleb is a unique figure in the world of financial risk management. He is a trader with a comprehensive understanding of the mathematics of derivatives. As such, this book represents what appears to be the twin pillars of his mission: to illustrate the shortcomings of mathematical models in practice and to make financial risk management more cognizant of the ‘animal spirits’ of the marketplace. He has been an outspoken critic of the use of Value-at-Risk techniques and other statistical methods of describing a trader’s performance.

Dynamic Hedging is the embodiment of the sophisticated techniques that a derivatives trader and risk manager must use on a minute-by-minute basis. It is one thing to read about the options greeks in a textbook or on this web site. This book shows you how to use them the way that they are used by the most successful derivatives traders in the world with real-life examples providing the context. The only criticism is that the first edition contains some typographical errors in the technical examples that may elude less sophisticated readers.

Jorion, Philippe, Value at Risk, 3rd Edition: The New Benchmark for Controlling Market Risk, October 2006, Irwin Professional Publications, ISBN 0071464956.

Value-at-Risk is a technique that has gained a great deal of popularity in part because of the SEC’s Market Risk Disclosure rule requirements regarding market risk reporting. Advances in technology and a growing awareness in the executive suite of the importance of financial risk management have also contributed to the popularity of Value-at-Risk. Value-at-Risk provides an in-depth background of the different techniques one can use to evaluate VaR, emphasizing the benefits and drawbacks of each approach. There is also a good analysis of the evolution of regulatory requirements for financial institutions and derivatives problems that have occurred in recent memory, some of which could have been reduced or avoided by the proper use of VaR. It remains controversial.

Vose, David, Risk Analysis: A Quantitative Guide, December 1996, John Wiley & Sons, ISBN 0470512849.

Monte Carlo simulation is a technique that is useful in finance for pricing derivatives and measuring risk. Quantitative Risk Analysis iintroduces the concept of Monte Carlo simulation to the reader who is familiar with the basic principles of statistics. However, the applicability to financial problems of Quantitative Risk Analysis is limited. It is oriented more to the needs of the industrial engineer. There are other books, including most recently a publication on the usefulness of simulation in finance published by Risk Publications, that are more suited for the practitioner. Quantitative Risk Analysis is also a solid manual for people who already have experience using Monte Carlo simulation and who require a reference text for a variety of statistical distributions.

Ravindran, K., Customized Derivatives, August 1997, McGraw-Hill, ISBN 0786305568.

This book is an overview of different techniques used for valuing derivative products, including Monte Carlo simulation. It presents a uniform framework for evaluating and comparing different products in an easy-to-read text peppered with frequent examples. It is most suited for risk managers and systems developers looking for an overview of derivatives pricing that is not too complicated. Traders will find the material not directly applicable enough.

Haug, Espen Gaarder, The Complete Guide to Option Pricing Formulas, December 2006, McGraw-Hill, ISBN 0071389970.

Haug’s textbook The Complete Guide to Option Pricing Formulas is a reference for experienced practitioners who require a quick and easy list of closed-form solutions for a variety of commonly used (and some exotic) options. You will not find any detailed information about how to interpret or use the prices that you obtain using these formulae. What you will find is a logical framework that matches the evolution of the prices and Visual Basic code to match each price.

McKay, Ralph, Risk Mechanics: Financial Derivatives - Finding and Fixing Risk Holes, July 1997, Ristek, ISBN 0646308033.

A brief but substantive book specializing, again, in presenting a uniform framework for pricing financial derivatives. For what you get, it is a tad pricy compared to the Haug textbook. This is also a product that will be useful for systems developers and risk managers.

Hull, John C., Options, Futures and Other Derivative Securities, 8th Edition, 2011, Prentice-Hall, ISBN 0132164949.

John Hull’s MBA textbook Options, Futures and Other Derivative Securities is often used in business school courses introducing derivatives or courses requiring some intermediate discussion of the mathematical techniques underlying the pricing methodologies of the vanilla products. This is a good book to read after having read Peter Bernstein’s Against the Gods. In practice, being able to price options is not enough for the risk manager when he has access to cutting-edge desktop computer applications. The risk manager must be able to intuitively understand the behavioral characteristics of the products for which he is responsible. While Options, Futures and Other Derivative Securities is a necessary primer on the mathematics of derivatives, it must be placed in the context of the rigors of practice. Nassim Taleb’s Dynamic Hedging is a good complement to the Hull text.

Chorafas, Dimitris, The Market Risk Amendment: Understanding the Marking-to-Model and Value-at-Risk, October 1997, McGraw-Hill, ISBN 0786312246.

The Bank for International Settlements (BIS) is charged with developing policies that ensure the stability of the global financial system. Part of that mandate involves the establishment, maintenance and evolution of policies regarding the capital requirements of financial institutions. The Market Risk Amendment addresses the Bank’s approach to the capital requirements for market risk held by financial institutions. The book is best for its description of the rules and the way they have developed. There are other sources that are better written (such as Jorion’s Value-at-Risk or the RiskMetrics Technical Document) when it comes to explaining the techniques involved.

Das, Satyajit, Swap & Derivative Financing: The Global Reference to Products, Pricing, Applications and Markets, August 1994, Probus Publishing Company, ISBN 1557385424.

This is an excellent desk reference for the pricing and risk management of swaps (in a variety of asset classes) and related securities, such as structured notes. A classic practitioner text.

Fabozzi, Frank J., Measuring and Controlling Interest Rate Risk, October 1996, Frank J. Fabozzi Assoc., ISBN 1883249090.

One of the textbooks used in the Chartered Financial Analyst program, Measuring and Controlling Interest Rate Risk is a primary textbook for interest rate risk identification and mitigation, including the use of Duration and Convexity to identify the sensitivity of cash flows to movements in interest rates. A solid introduction.

Mason, Scott, Robert Merton, Andre Perold and Peter Tufano, Cases in Financial Engineering: Applied Studies of Financial Innovation, January 1995, Prentice-Hall, ISBN 0130794198.

A textbook featuring case studies in derivative products and risk management with cases taken from contemporary investment bank situations. Peter Tufano, a professor at Harvard Business School, is a well-recognized educator in financial risk management.

Braddock, John, Derivatives Demystified: Using Structured Financial Products, April 1997, John Wiley & Sons, ISBN 0471146331.

Galitz, Lawrence, Financial Engineering: Tools and Techniques to Manage Financial Risk, March 1995, Irwin Professional Publishers, ISBN 078630362X.

Schwartz, Robert J. (ed.), Derivatives Handbook: Risk Management and Control, May 1997, John Wiley & Sons, ISBN 0471157651.

A collection of articles on the management of derivatives operations intended for lawyers and senior executives. The analysis of legal issues facing derivatives is outstanding. There is also a great article by Jeff Selzer and Charles Smithson. Smithson is a well-recognized name in global derivatives having published several books (including Managing Financial Risk cited below), from his work with the International Swaps Dealers Association and from his position as a Managing Director in charge of derivatives education at CIBC World Markets.

Alexander, Carol (ed.), The Handbook of Risk Management and Analysis Vol. 2, November 1998, John Wiley & Sons, ISBN 0471979597.

One of the textbooks used in the Financial Risk Manager program, certified by the Global Association of Risk Professionals, this book has a slightly more academic focus. An example of this is the discussion of econometrics and volatility forecasting. It does have a comprehensive overview of equity markets and emerging markets. Look for further updates of this book to account for contemporary developments in the global derivatives markets.

Smithson, Charles and Clifford Smith, Managing Financial Risks: A Guide to Derivative Products, Financial Engineering and Value Maximization, July 1998, McGraw-Hill, ISBN 007059354X.

An outstanding description of the dimensions of financial risk management in a variety of asset classes, Smithson and Smith write a book that is designed for the risk practitioner. Full of examples, both contrived and actual, Smithson and Smith have written a textbook that makes it easier for the risk manager to translate their lessons into practical everyday use than other more academically oriented textbooks available. Check out the section on deciphering financial statements for clues about financial risk management and potential financial risks facing the firm. This kind of book will become indispensable to corporate risk managers starting to confront the implementation of FASB Statement No. 133.

Gastineau, Gary L. and Mark Kritzman, Dictionary of Financial Risk Management, October 1996, Irwin Professional Publications, ISBN 1883249147.

Exactly what it purports to be, this is a dictionary of the terminology relevant to financial price risk.

Fabozzi, Frank (ed.), The Handbook of Fixed Income Securities (5th ed.), January 1997, Irwin Professional Publications, ISBN 0786310952.

A good, general resource for anyone dealing with fixed income instruments.

Fabozzi, Frank and Franco Modigliani, Capital Markets: Institutions and Instruments, February 1996, Prentice Hall, ISBN 0133001873.

Fabozzi, Frank and Alberto Franco (eds.), Handbook of Emerging Fixed Income and Currency Markets, August 1998, Frank Fabozzi Associates, ISBN 1883249333.

Tavakoli, Janet, Credit Derivatives: A Guide to Instruments and Applications, July 1998, John Wiley & Sons, ISBN 0471246565.

Das, Satyajit (ed.), Credit Derivatives: Trading & Management of Credit & Default Risk, March 1998, John Wiley & Sons, ISBN 0471248568.

Das, Satyajit (ed.), Risk Management and Financial Derivatives: A Guide to the Mathematics, May 1998, McGraw-Hill, ISBN 0070153787.

Caouette, John, Edward Altman and Paul Narayanan, Managing Credit Risk: The Next Great Financial Challenge, October 1998, John Wiley & Sons, ISBN 0471111899.

Dowd, Kevin, Beyond Value-at-Risk: The New Science of Risk Management, April 1998, John Wiley & Sons, ISBN 0471976210.

Alexander, Carol and John Hull (eds.), Risk Management and Analysis: Risk Measurement and Management, January 1999, John Wiley & Sons, ISBN 0471979570.

Zhang, Peter, Barings Bankruptcy and Financial Derivatives, November 1995, World Scientific Publishing Company, ISBN 9810223331.

Jorion, Philippe and Robert Roper, Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County, October 1995, Academic Press, ISBN 0123903602


I have borrowed heavily from the suggested reading lists in books such as Willmott 1998.

Campbell, John, Andrew W. Lo and A. Craig MacKinlay, The Econometrics of Financial Markets, December 1996, Princeton, ISBN 0691043019.

This is an excellent book on the topic of Investments, containing a comprehensive overview of much of the work in the field of investments, including portfolio theory, the capital asset pricing model, arbitrage pricing theory and some of the more esoteric research of the authors. It is interesting to see the link between this specific research and the use by hedge funds to profit with actual trading rules in the equity markets. An outstanding book, although one that may be too quantitatively set up for some.

Cox, John C. and Mark Rubinstein, Options Markets, December 1985, Prentice-Hall, ISBN 0136382053.

Intellectually elegant, comprehensive and groundbreaking, this is the book to read if you want to understand the binomial options pricing model, the Black-Scholes options pricing model (from a more intuitive standpoint) and the way in which options markets function in practice. I prefer this way of approaching the options pricing problem. The math is very simple.

Crank, J.C., Mathematics of Diffusion, June 1975, Oxford, ISBN 0198534116.
Dixit, A.K. and R.S. Pindyck, Investment Under Uncertainty, January 1994, Princeton, ISBN 0691034109.

This landmark book (and I believe an attendant article in the Harvard Business Review) put the concept of so-called real options into the contemporary financial lexicon. The notion that there exists all kinds of optionality in financial decision-making, a process that has been modeled as more of a series of binary obligations, has significant implications for the merits of contemporary corporate finance valuation methodologies.

Elton, E.J. and M. J. Gruber, Modern Portfolio Theory and Investment Analysis, 1995, John Wiley & Sons, ISBN 0471007439.

Ingersoll, J.E. Jr., Theory of Financial Decision Making, 1987, Rowman & Littlefield, ISBN 0847673596.

Malkiel, B.G., A Random Walk Down Wall Street, 1990, Norton, ISBN 0393320405.

Markowitz, H., Portfolio Selection: Efficient Diversification of Investment, 1959, John Wiley & Sons, ISBN 1557861080.

It would be difficult to imagine a piece of economics, other than the Black-Scholes formula, with a more widespread understanding and application in finance than Markowitz' theory of portfolio diversification.

Markowitz, H., G. Peter Todd and Peter Todd, Mean-Variance Analysis in Portfolio Choice and Capital Markets, March 2000, McGraw-Hill Professional Publishing, ISBN 1883249759.

Merton, R.C., Continuous-Time Finance, 1992, Blackwell, ISBN 0631185089.

Continuous-time finance from arguably the man who invented continuous time finance.

Miller, M., Merton Miller on Derivatives, 1997, John Wiley & Sons, ISBN 0471183407.

Morton, K.W. and D.F. Mayers, Numerical Solution of Partial Differential Equations: An Introduction, 1994, Cambridge, ISBN 0521429226.

Neftci, S., An Introduction to the Mathematics of Financial Derivatives, 1996, Academic Press, ISBN 0125153929.

Oksendahl, B., Stochastic Differential Equations, 1992, Springer-Verlag, ISBN 3540637206.
Press, W.H., S.A. Teutolsky, W.T. Vetterling and B.P. Flannery, Numerical Recipes in C, Cambridge, ISBN 0521431085.

Schwager, J.D., Market Wizards, 1990, HarperCollins, ISBN 0887306101.

This book and The New Market Wizards give very readable descriptions of the trading styles of some of the world's most successful speculators. It is an interesting question whether the approaches that these men have taken will be suitable for the brave new world of 21st century financial markets. Nevertheless, Schwager provides a very entertaining view of the markets. Economic history in action, if you will.

Schwager, J.D., New Market Wizards, 1992, HarperCollins, ISBN 0887306675.

Sharpe, W.F., Investments, 1985, Prentice-Hall, ISBN 0130101303.

Smith, G.D., Numerical Solution of Partial Differential Equations: Finite Difference Methods, 1985, Oxford, ISBN 0198596502.

Soros, G., The Alchemy of Finance, 1987, John Wiley & Sons, ISBN 0471042064.

Wilmott, P., J. Dewynne and S.D. Howison, Option Pricing: Mathematical Models and Computation, 1993, Oxford Financial Press, ISBN 0952208202.

This is a more mathematical treatment of the core material in Wilmott's Derivatives book. The authors frame the derivation of the Black-Scholes formula in the context of the heat equation. This may be intuitive for some people, particularly those with a chemical engineering-type background. However, for those people with a more economics-oriented sense of intuition, Cox and Rubinstein may prove a more intellectually satisfactory route to understanding the logic behind the Black-Scholes formula and its constituent parts.

Corporate Finance

Copeland, Tom and Vladimir Antikarov, Real Options: A Practitioner's Guide, February 2001, Texere, ISBN 1587990288.

This is probably the most practical book on real options that has been published to date. While the book spends much of its time rehashing the binomial options formula, it does set up an interesting topology of corporate real options in practice and it does emphasize the importance of real options for valuation. Beware of some important typos in the derivations, though. Look for these to be fixed by the second edition.

Brealey, Richard, Stewart Myers and Franklin Allen, Principles of Corporate Finance + S&P Market Insight, February 2010, ISBN 0077356381.

Campbell, John, Andrew Lo and A. Craig MacKinlay, The Econometrics of Financial Markets, December 1996, ISBN 0691043019.


Taleb, Nassim Nicholas, The Black Swan: Second Edition, May 2010, ISBN 081297381X.

Taleb, Nassim Nicholas, Fooled by Randomness: The Hidden Role of Chance in Life and the Markets, October 2008, ISBN 1400067936.