Robert L. McDonald
Derivatives Markets
You cannot understand modern finance and financial markets without understanding derivatives.
This book will help you to understand the derivative instruments that exist, how they
are used, how they are priced, and how the tools and concepts underlying derivatives are
useful more broadly in finance.
Derivatives are necessarily an analytical subject, but I have tried throughout to emphasize
intuition and to provide a common sense way to think about the formulas. I do assume
that a reader of this book already understands basic financial concepts such as present value,
and elementary statistical concepts such as mean and standard deviation. In order to make
the book accessible to readers with widely varying backgrounds and experiences, I use a
“tiered” approach to the mathematics. Chapters 1–9 emphasize present value calculations,
and there is almost no calculus until Chapter 18.
The last part of the book develops the Black-Scholes-Merton approach to pricing
derivatives and presents some of the standard mathematical tools used in option pricing,
such as Itˆo’s Lemma. There are also chapters dealing with applications to corporate finance,
financial engineering, and real options.
