Review of Derivatives Research

The proliferation of derivative assets during the past two decades is unprecedented. With this growth in derivatives comes the need for financial institutions, institutional investors, and corporations to use sophisticated quantitative techniques to take full advantage of the spectrum of these new financial instruments. Academic research has significantly contributed to our understanding of derivative assets and markets. The growth of derivative asset markets has been accompanied by a commensurate growth in the volume of scientific research.

Analysis on risk management, derivatives and regulation

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Derivatives Quarterly

Derivatives Quarterly educates the financial professional on derivatives, explaining how and why they are used, defining the risks and benefits, and providing practical strategies and real-life applications. It is the perfect derivatives guide to successful risk management and performance enhancement for all financial professionals, including treasury and asset/liability specialists, CFOs, corporate risk and money managers, traders, sales people, investment and pension fund managers, consultants, research analysts, and commercial bankers.


International Journal of Financial Markets and Derivatives

Editor in Chief: Dr. Christos Floros

ISSN online: 1756-7149
ISSN print: 1756-7130 4 issues per year

IJFMD addresses the advancement of contemporary research in the field of financial markets and derivatives. It is an internationally competitive, peer-reviewed journal dedicated to serve as the primary outlet for theoretical and empirical research in all areas of international markets and derivatives.

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Journal of Derivatives

Institutional Investor, Inc.'s Journals are quarterly publications offering in-depth, original and practical research in global investment and finance with an extensive online archive. Each Journal is written and edited by leading practitioners and academics and is read by finance industry professionals. Each Journal provides current analyses and strategic insights that translate into implementable ideas for global investment management **professionals.**


Journal of Derivatives & Hedge Funds

The Journal of Derivatives & Hedge Funds covers new and emerging trends in derivatives trading, quantitative finance, and hedge funds. It is a unifying forum for the exchange of ideas and information between industry practitioners, academic researchers and money managers from around the world.


A closed-form solution for options with ambiguity about stochastic volatility

Gonçalo Faria, João Correia-da-Silva

Review of Derivatives Research
, Volume 17, Issue 2, pp 125-159

We derive a closed-form solution for the price of a European call option in the presence of ambiguity about the stochastic process that determines the variance of the underlying asset’s return. The option pricing formula of Heston (Rev Financ Stud 6(2):327–343, 1993) is a particular case of ours, corresponding to the case in which there is no ambiguity (uncertainty is exclusively risk).

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An overview of the valuation of collateralized derivative contracts

Jean-Paul Laurent, Philippe Amzelek, Joe Bonnaud

Review of Derivatives Research
October 2014, Volume 17, Issue 3, pp 261-286

We consider the valuation of collateralized derivative contracts such as interest rate swaps or forward FX contracts. We allow for posting securities or cash in different currencies. In the latter case, we focus on using overnight index rates on the interbank market.

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Are put-call ratios a substitute for short sales?

Benjamin M. Blau, Tyler J. Brough

Review of Derivatives Research
October 2014

Prior research argues that pessimistic traders can use options as substitutes for short sales particularly when stocks are expensive to short. Motivated by this contention, we examine the relation between put-call ratios, short-selling activity, and constraints to short selling.

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BOOK REVIEW: Derivatives: Principles and Practice

Stephen Figlewski

The Journal of Derivatives
Summer 2010, Vol. 17, No. 4: pp. 79-81

Rangarajan Sundaram and Sanjiv Das have just published a new textbook on derivatives, Derivatives: Principles and Practice. Sanjiv is a co-editor of The Journal of Derivatives, as was Raghu until fairly recently, so while it was in process one hoped (and expected) that their book would be very good. We review their excellent new contribution to the derivatives bookshelf here.

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Commodity derivative valuation under a factor model with time-varying market prices of risk

Andrés G. Mirantes, Javier Población, Gregorio Serna

Review of Derivatives Research
October 2014

It is well known that market prices of risk play an important role in commodity derivative valuation. There is an extensive literature showing that market prices of risk vary through time. Based on these results, a factor model, with two long- and short-term factors, with market prices of risk depending on these underlying asset factors is proposed and estimated, using data from crude oil, heating oil, unleaded gasoline and natural gas futures prices traded at NYMEX.

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Considerations for Frozen Pension Plans: Immunization or Termination?

Evan Inglis and Nathan Zahm

Special Issues
Fall 2014, Vol. 2014, No. 1: pp. 22-34

Many plan sponsors today are managing frozen pension plans and will ask, “How long should our organization continue to maintain and manage the plan?” Will the plan liabilities be retained by the plan sponsor, with risk minimized by investing in a portfolio of matching assets, or will the plan be terminated, with the future risks and costs of the plan passed onto the participants and/or an insurer?

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Dynamics of Sovereign Credit Contagion

Alex YiHou Huang, Chih-Chun Chen, and Chung-Hua Shen

The Journal of Derivatives
Fall 2014, Vol. 22, No. 1: pp. 27-45

“Contagion” is when a bad credit event in one country spills over and infects other countries that would not otherwise have experienced credit problems. Contagion has attracted considerable research interest without any consensus on how to measure it or whether it exists at all.

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Efficiently pricing double barrier derivatives in stochastic volatility models

Marcos Escobar, Peter Hieber, Matthias Scherer

Review of Derivatives Research
July 2014, Volume 17, Issue 2, pp 191-216

Imposing a symmetry condition on returns, Carr and Lee (Math Financ 19(4):523–560, 2009) show that (double) barrier derivatives can be replicated by a portfolio of European options and can thus be priced using fast Fourier techniques (FFT).

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First Steps in Longevity Risk Management

Guy Coughlan

Special Issues
Fall 2014, Vol. 2014, No. 1: pp. 10-16

Defined benefit (DB) pension plans should evaluate their sensitivity to longevity risk in order to quantify its impact and facilitate more effective plan-management strategies. While this might seem daunting at first glance, doing so is easier than is commonly thought.

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Implied Volatility Dynamics Among Exchange-Traded Funds and Their Largest Component Stocks

Timothy A. Krause, and Donald Lien

The Journal of Derivatives
Fall 2014, Vol. 22, No. 1: pp. 7-26

The authors implement a new model for time-variation in implied volatilities and the correlations among them to look for common factors both at the aggregate market level and also within industries. The securities under consideration are ETFs and the largest of their component stocks.

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Longevity Risk—A Fine Balance

George Graziani

Special Issues
Fall 2014, Vol. 2014, No. 1: pp. 35-37

With longevity now a clearly recognized systematic trend risk, institutions and individuals are looking for guidance in better understanding their exposure. They also seek assistance in developing solutions and products to manage the risk in a way that provides them control and balance with risks and opportunities, including investment, liquidity, and other core business that they face.

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New Mortality Rates Trigger a Leap in Pension Liabilities

Justin W. Owens

Special Issues
Fall 2014, Vol. 2014, No. 1: pp. 17-21

The Society of Actuaries (SOA) recently released exposure drafts of new mortality tables that are likely to be used in defined benefit (DB) plan valuations and other pension liability calculations within the next few years.

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Options pricing under the one-dimensional jump-diffusion model using the radial basis function interpolation scheme

Ron Tat Lung Chan, Simon Hubbert

Review of Derivatives Research
July 2014, Volume 17, Issue 2, pp 161-189

This paper will demonstrate how European and American option prices can be computed under the jump-diffusion model using the radial basis function (RBF) interpolation scheme. The RBF interpolation scheme is demonstrated by solving an option pricing formula, a one-dimensional partial integro-differential equation (PIDE).

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Pricing American Options by Willow Tree Method Under Jump-Diffusion Process

Wei Xu, and Yufang Yin

The Journal of Derivatives
Fall 2014, Vol. 22, No. 1: pp. 46-56

Numerical solution methods for option pricing fall into two broad classes, either the lattice framework or Monte Carlo simulation. Monte Carlo simulation is problematic for American options, while the Binomial and Trinomial approaches have difficulty incorporating stochastic jumps. The probability density at expiration that is generated by a lattice typically has different skewness and kurtosis than is embedded in option market prices.

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The Buy-Write Strategy, Index Investment, and the Efficient Market Hypothesis: More Australian Evidence

Darren O’Connell, and Barry O’Grady

The Journal of Derivatives
Fall 2014, Vol. 22, No. 1: pp. 71-89

One of the most basic and most popular options strategies is the “buy-write,” in which an underlying asset is purchased and a call option is written against it. This trade gives up the possibility of very large returns in a strong rally in order to gain an extra profit in a moderate rally and some compensation against losses on the downside.

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The effects of corporate governance and accounting rule changes on derivatives usage

Ching-Lung Chen, Hung-Shu Fan, Ya-Ming Yag

Review of Derivatives Research
October 2014, Volume 17, Issue 3, pp 323-353

The ongoing growth in use of financial instruments together with the accompanying disclosing requirements debate has motivated this study to examine the role of internal corporate governance and accounting rule changes in firms’ derivatives using derisions. The empirical results reveal that firms with better internal corporate governance have higher demand on hedging-purpose derivatives usage in Taiwan. Moreover, the magnitude of hedging-purpose derivatives usage significantly decreases following the enforcement of SFAS No. 34.

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The impact of quantitative easing on the US term structure of interest rates

Robert Jarrow, Hao Li

Review of Derivatives Research
October 2014, Volume 17, Issue 3, pp 287-321

This paper estimates the impact of the Federal Reserve’s 2008–2011 quantitative easing (QE) program on the US term structure of interest rates. We estimate an arbitrage-free term structure model that explicitly includes the quantity impact of the Fed’s trades on Treasury market prices. As such, we are able to estimate both the magnitude and duration of the QE price effects. We show that the Fed’s QE program affected forward rates without introducing arbitrage opportunities into the Treasury security markets. Short- to medium- term forward rates were reduced ( <12 years), but the QE had little if any impact on long-term forward rates.

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The price discovery of day trading activities in futures market

Ming-Hsien Chen, Vivian W. Tai

Review of Derivatives Research
July 2014, Volume 17, Issue 2, pp 217-239

Access to information is necessary for market transparency. However, contrary to trading volume and open interest, information related to day trading activities is rarely available. By incorporating unexplored day trading volume in the literature, this paper demonstrates that both the expected open interest and expected day trading volume are consistently and positively correlated with returns, but that one-lagged day trading volume is negatively correlated with futures returns.

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The Quantification of Basis Risk in Synthetic Longevity Transactions

Chris Madsen, Martijn Tans, Balazs Toth, and Ing Tai Ching

Special Issues
Fall 2014, Vol. 2014, No. 1: pp. 38-45

he topic of basis risk in synthetic longevity transactions (where the hedge is based on a population different from the actual policy portfolio) has been a hotly debated topic. To date, no single standard has been adopted, and both regulators and market participants are increasingly pointing to this as a shortcoming in the development of the longevity risk transfer market.

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Volatility-Decay Risk Premia

Dan Galai, Haim Kedar-Levy, and Ben Z. Schreiber

The Journal of Derivatives
Fall 2014, Vol. 22, No. 1: pp. 57-70

As our options models have gotten more realistic, but more complicated, there are more and more relevant risks that pose serious concerns for investors. Current models feature stochastic diffusive volatility, stochastic jumps of random magnitude to returns and/or volatility, with different effects for up and down jumps, and more.

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What Is the True Cost of Active Management? A Comparison of Hedge Funds and Mutual Funds

Jussi Keppo, and Antti Petajisto

The Journal of Alternative Investments
Fall 2014, Vol. 17, No. 2: pp. 9-24

On the surface, hedge funds seem to have much higher fees than actively managed mutual funds. However, the true cost of active management should be measured relative to the size of the active positions taken by a fund manager. A mutual fund combines active positions with a passive position in the benchmark index, which can make the active positions expensive.

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A Primer For The Mathematics Of Financial Engineering, Second Edition (Financial Engineering Advanced Background Series)

by Dan Stefanica

Paperback – March 24, 2011

Reviews for “A Primer for the Mathematics of Financial Engineering”, First Edition:
"One of the hottest degrees on today's campus is a Masters in Financial Engineering. Whether you need to retrieve hallowed memories or just want to familiarize yourself with the mathematics underlying this degree, this unique book offers a terrific return on investment.”

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An Introduction to the Mathematics of Financial Derivatives, Second Edition (Academic Press Advanced Finance)

by Salih N. Neftci

Hardcover – June 2, 2000

This popular text, publishing Spring 1999 in its Second Edition, introduces the mathematics underlying the pricing of derivatives. The increase of interest in dynamic pricing models stems from their applicability to practical situations: with the freeing of exchange, interest rates, and capital controls, the market for derivative products has matured and pricing models have become more accurate.

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Derivatives: The Theory and Practice of Financial Engineering (Wiley Frontiers in Finance Series)

by Paul Wilmott

Hardcover – December 8, 1998

Derivatives by Paul Wilmott provides the most comprehensive and accessible analysis of the art of science in financial modeling available. Wilmott explains and challenges many of the tried and tested models while at the same time offering the reader many new and previously unpublished ideas and techniques. Paul Wilmott has produced a compelling and essential new work in this field.

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Dynamic Hedging: Managing Vanilla and Exotic Options

by Nassim Nicholas Taleb

Hardcover – January 14, 1997

Dynamic Hedging is the definitive source on derivatives risk. It provides a real-world methodology for managing portfolios containing any nonlinear security. It presents risks from the vantage point of the option market maker and arbitrage operator.

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Option Market Making: Trading and Risk Analysis for the Financial and Commodity Option Markets

by Allen Jan Baird

Hardcover – October 16, 1992

Approaches trading from the viewpoint of market makers and the part they play in pricing, valuing and placing positions. Covers option volatility and pricing, risk analysis, spreads, strategies and tactics for the options trader, focusing on how to work successfully with market makers. Features a special section on synthetic options and the role of synthetic options market making (a role of increasing importance on the trading floor). Contains numerous graphs, charts and tables.


Option Pricing

by Robert A. Jarrow and Andrew Rudd

Hardcover – September 1, 1983

"This self-contained book provides a through, unified presentation of option pricing, incorporating . . .the important option models. . .A masterly synthesis of mathematics and finance, accompanied by charts and graphs, Option Pricing offers a comprehensive overview of the options market and strategies, as well as complete and useful discussions of the theory of options pricing. . ." This is considered to be a seminal work in options pricing.


Option Strategy Risk / Return Ratios: A Revolutionary New Approach to Optimizing, Adjusting, and Trading Any Option Income Strategy

by Brian Johnson

Paperback – April 22, 2014

Written by Brian Johnson, a professional investment manager with many years of trading and teaching experience, Option Strategy Risk/Return Ratios introduces a revolutionary new framework for evaluating, comparing, adjusting, and optimizing option income strategies. Drawing on his extensive background in option-pricing and on decades of experience in investment management and trading, Brian Johnson developed these tools specifically to manage option income strategies.

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Option Volatility & Pricing: Advanced Trading Strategies and Techniques

by Sheldon Natenberg

Hardcover – August 1, 1994

One of the most widely read books among active option traders around the world, Option Volatility & Pricing has been completely updated to reflect the most current developments and trends in option products and trading strategies.

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Options as a Strategic Investment

by Lawrence G. McMillan

Hardcover – August 7, 2012

The market in listed options and non-equity option products provides investors and traders with a wealth of new, strategic opportunities for managing their investments. This updated and revised Fifth Edition of the bestselling Options as a Strategic Investment gives you the latest market-tested tools for improving the earnings potential of your portfolio while reducing downside risk—no matter how the market is performing.

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Options Markets

by John C. Cox and Mark Rubinstein

Paperback – February 8, 1985

This exploration of options markets blends institutional practice with theoretical research. Discusses theoretical models for the valuation of options and outlines trading strategies for puts and calls.


Options Trading Strategies: Complete Guide to Getting Started and Making Money with Stock Options

by Scott J. Danes

Paperback – September 13, 2014

Complete Guide to Getting Started and Making Money with Options Trading Novice, and even experienced, investors are often wary of investing in options. Many people view options as risky, exotic, and only for investors with large bankrolls. However, nothing could be further from the truth. Options are a great way for all investors, regardless of experience or risk tolerance, to expand their portfolios and make money in the stock market—whether the market is going up or down.

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Options, Futures and Exotic Derivatives: Theory, Application and Practice

by Eric Briys, Mondher Bellalah, Huu Minh Mai and François de Varenne

Paperback – May 8, 1998

"Over the past two decades, the mathematically complex models of finance theory have had a direct and wide-ranging influence on finance practice. Nowhere is this conjoining of intrinsic intellectual interest with extrinsic application better exemplified than in derivative-security pricing. The backgrounds of the authors of Options, Futures and Exotic Derivatives fit perfectly this pattern of combining theory and practice and so does their book.

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Options, Futures, and Other Derivatives (9th Edition)

by John C Hull

Hardcover – January 25, 2014

For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets

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Simple Option Trading Formulas: Step-By-Step Strategies Used By Elite Option Traders

by Billy Williams

Paperback – January 2, 2014

Want to learn how to successfully trade options for both income and profit? Want to learn how to spot winning trades in the stock market and avoid losing ones? Do you want to build a steady second household income? Build up your retirement account to retire early and in comfort? Or, do you want to learn the same skills that winning option traders know so that you can go pro one day too? As a frequent contributor to Futures Magazine,, Advantage and other top financial publications, I know from experience that the world of option trading offers enormous potential for traders who are smart enough to recognize them.

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Stigum's Money Market

by Marcia Stigum and Anthony Crescenzi

Hardcover – March 2, 2007

First published in 1978, Stigum's Money Market was hailed as a landmark work by leaders of the financial, business, and investment communities. This classic reference has now been revised, updated, and expanded to help a new generation of Wall Street money managers and institutional investors.

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The Bible of Options Strategies: The Definitive Guide for Practical Trading Strategies

by Guy Cohen

Hardcover – April 17, 2005

"Guy Cohen is the master when it comes to taming the complexities of options. From buying calls and puts to iron butterflies and condors, Guy explains these strategies in a clear and concise manner that options traders of any level can understand. His chapter on options and taxes is especially welcomed (and needed). The Bible of Options Strategies is a straightforward, easy-to-use reference work that should occupy a space on any options trader's bookshelf."

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The Complete Guide to Option Pricing Formulas

by Espen Gaarder Haug

Hardcover – January 8, 2007

Long-established as a definitive resource by Wall Street professionals, The Complete Guide to Option Pricing Formulas has been revised and updated to reflect the realities of today's options markets. The Second Edition contains a complete listing of virtually every pricing formula_ all presented in an easy-to-use dictionary format, with expert author commentary and ready-to-use programming code.

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The Mathematics of Money Management: Risk Analysis Techniques for Traders

by Ralph Vince

Hardcover – April 17, 1992

Every futures, options, and stock markets trader operates under a set of highly suspect rules and assumptions. Are you risking your career on yours? Exceptionally clear and easy to use, The Mathematics of Money Management substitutes precise mathematical modeling for the subjective decision-making processes many traders and serious investors depend on.

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When Genius Failed: The Rise and Fall of Long-Term Capital Management

by Roger Lowenstein

Paperback – October 9, 2001

In this business classic—now with a new Afterword in which the author draws parallels to the recent financial crisis—Roger Lowenstein captures the gripping roller-coaster ride of Long-Term Capital Management.

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