June 26, 2008
I’ve finished Derman‘s book now, and rate it very highly. Anyone going into software development for rates trading should read it. I’ve mentioned before how it’s a great combination of personal narrative and anecdotage. The final chapters top this off with some great pop science writing on financial engineering innovations since Black-Scholes. Usually the authors of accessible pop science texts are not the same people as those who made the original breakthroughs. Derman is great at explaining the work of Black, Scholes and Merton. By way of explaining the Black-Derman-Toy interest rate model he gives us an accessible explanation of curve bootstrapping. His coverage of the puzzle of the volatility smile and the use of binomial trees in modelling it is excellent too.