Core Readings

[srinu2singaraju]

Hi David,


I the core readings, I found it is very difficult to follow the book on Derivatives Markets by McDonald. Please suggest to me which areas I should concentrate from this book Will it be sufficient If I follow only BT material for this topic?


Another one is from Valuations and Risk Models: Do I necessarily read Tuckman? Why I am asking is, I have read John Hull all the chapters from 1 to 10. The chapters which are covered in Tuckman are already covered (I mean most of the areas) in Hull’s first 5 chapters.

My confusion is, for example, I have learnt how to calculate forward rates from Hull, in

Tuckman my use different style to calculate forward rates. Finally I should not be confused from different calculations.


Please advise me.

 

[David Harper CFA FRM]

Hi srinivas,

Only Chapter 6 of McDonald is assigned, right? Still, I agree with you, it is a challenging chapter. Further, as you suggest, it has a high degree of overlap with Hull (I think i said so in the video....). My candid view, therefore, is that the theory in the first part of this chapter is non-vital ASSUMING you have studied the cost-of-carry in Hull (i.e. pricing of futures that is mostly in Hull Ch 5). The only notable difference (IMO) is that McDonald spends time--to some confusion--on the lease rate; which, for shorthand/practical purposes, we can treat as a convenience yield. In my experience, Culp is confusing largely b/c of his use of the lease rate. My really candid view is that Culp Chapter 6 is non-essential if you grasp the corresponding Hull.

Other than the first part of Ch 6, I might just review the commodities at the end which are unique to Culp; e.g., why is corn is contango/backwardation (e.g., there has been one question about Corn's forward curve due to harvest, so that needed Culp's focus on consumption commodities); why is natural gas also contango/backwardation.

Re Tuckman, agreed that some of Tuckman repeats in Hull, but not everything; e.g., I don't think Hull refers to DV01. I do recommend Tuckman for the depth on the single-factor sensitivities (duration, DV01, convexity) ... here is the thing about Tuckman:

1. traditionally, the earlier chapters (1-5) have been somewhat tested; e.g., duration
2. the later chapters that now appear in Level 2 (7, 9, 21) have always frustrated me b/c they have been assigned but rarely tested (especially Ch 9, Term Structure: a difficult chapter which requires time, but to my knowledge the difficult ideas have hardly ever been tested; risk-neutral valuation; replicating portfolio; binomial for CMT)...HOWEVER, now we have a new Level 2, so it is dubious to extrapolate forward into the L1+L2 (??)

Re: Hull vs Tuckman. I TOTALLY AGREE this is a confusion. It has been a confusion for years; I have asked GARP to standardize on continuous, but they have made no guarantees. Tuckman assumes semi-annual; Hull assumes continuous. In many cases, the only difference is this discrete/continuous compounding to otherwise identical concepts (e.g., bond pricing). The best strategy is to be comfortable with both, and the translation between them....

Hope this helps, David