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Financial Hacking: Evaluate Risks, Price Derivatives, Structure Trades, And Build Your Intuition Quickly And Easily

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This book teaches financial engineering in an innovative by providing tools and a point of view to quickly and easily solve real front-office problems. Projects and simulations are not just exercises in this book, but its heart and soul. You will not only learn how to do state-of-the-art simulations and build exotic derivatives valuation models, you will also learn how to quickly make reasonable inferences based on incomplete information. This book will give you the expertise to make significant progress in understanding brand new derivatives given only a preliminary term sheet, thus making you extraordinarily valuable to banks, brokerage houses, trading floors, and hedge funds.

"Financial Hacking" is not about long, detailed mathematical proofs or brief summaries of conventional financial theories; it is about engineering specific, useable answers to imprecise but important questions. It is an essential book both for students and for practitioners of financial engineering.

MBAs in finance learn case-method and standard finance mainly by talking. Mathematical finance students learn the elegance and beauty of formulas mainly by manipulating symbols. But financial engineers need to learn how to build useful tools, and the best way to do that is to actually build them in a test environment, with only hypothetical profits or losses at stake. That's what this book does. It is like a trading desk sandbox that prepares graduate students or others looking to move closer to trading operations.

Foreword
Foreword (309 KB)
Sample Chapter(s)
Chapter 6: Puzzles and Bugs (269 KB)
Chapter 9: The Best Trade in the World? (93 KB)
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"Vanilla "RiskArbitrageTrading Puzzles"Vanilla "Black-ScholesSimulationPuzzles and Bugs"Exotic "Single-Asset Exotic OptionsMulti-Asset Exotic Options"Exotic "The Best Trade in the World?Variance SwapsEsoteric Worlds and Derivatives
Graduate and research students, finance practitioners and anyone passionate about the field of financial engineering.

198 pages, Kindle Edition

First published October 1, 2012

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Displaying 1 - 6 of 6 reviews
Profile Image for Robert.
299 reviews
November 24, 2022
Financial Hacking is witty, practical, and informative introduction to financial derivatives that is a welcome reprieve from the overly-academic treatments common in the space. It is the least academic options textbook I’ve come across; I’m not even sure if it identifies as a textbook...

Maymin encourages readers to develop heuristics and rely on intuition, hacking together quick simulations instead of mucking about with stochastic calculus. This emphasis on experimentation is one of the areas where the book stands out. Rather than just presenting simulation results, Maymin explains some of the common gotchas when it comes to writing simulation programs. Having spent hours trying to build and debug such scripts, I know how valuable this is.

Technical explanations are given in plain English, and the book is packed with little financial puzzles that memorably elucidate the concepts at hand; some of these puzzles address questions that took me a long time to build an intuition for (like why we can’t always sell skew), others address questions I had never thought to ask.

Regarding where this book fits in with other volatility resources, Financial Hacking discusses similar content to that in Sinclair’s Volatility Trading, but it is more “interactive” due to the puzzles and step-by-step explanations. Part 3 of the book covers exotic options: though this isn’t particularly relevant to me, it’s a good illustration of the financial hacker’s approach – rather than trying to analytically price some complex derivative, we can use intuition to get a rough sense of the risks. Maxime de Bellefroid's The Derivatives Academy is a nice next step for people who want to move beyond pure “hacking” into the pricing of exotics (still retaining a focus on intuition).

I enjoyed Financial Hacking immensely and would be comfortable recommending it (possibly excluding Part 3) as one of the first books one should read on a derivatives trading desk. I end this review with Maymin’s financial hacking manifesto:

“Accumulate risks that are hateful to others; dispose of risks that are hateful to you. That is the whole of financial hacking; the rest is commentary. Now go and trade.”
>
My highlights here.
228 reviews3 followers
July 3, 2018
As I was reading this book, I was wondering some times if the purpose was to clarify things or to confuse even further. By taking the point of view "confusion is ignorance leaving the brain ", I guess it is a good book!

This book is about playing around with financial derivatives, their pricing and hidden risks. A very good risk for people who work in the field of mathematical finance.
Profile Image for Eli Nickoll.
15 reviews1 follower
December 29, 2024
I found this book extremely helpful and a very broad exploration of financial derivatives. Maymin provides the reader with deep intuition about pricing and understanding vanilla options, single-asset exotics, multi-asset exotics, and markets. The structure of the book is super fun: it is littered with puzzles, intuitions, stories, and quotes. It was a tiny bit sloppy: I usually don’t care, but there were numerous typos and writing mistakes that often led to the book stating the opposite conclusions from what the author clearly meant.

The most interesting idea covered was the idea of a financial “hacker” as opposed to a mathematician. While financial mathematicians/engineers focus on deriving closed-form solutions to equations, hackers focus on developing a far more intuitive, and quick understanding of different pricing dynamics. Maymin follows the hacker’s creed throughout the book and ensures the reader truly intuitively understands the topics covered in the book.

A non-exhaustive list of topics covered is listed here:

1. Relative Volume
2. Value at Risk
3. Put-Call Parity
4. Black Scholes
5. Single-Asset Exotic Options
6. Multi-Asset Exotic Options
7. Volatility Smile
8. Warrants
9. Convertible Bonds

I especially enjoyed the intuitive derivation of Black-Scholes (Chapter 4) where he takes the reader from the basics of options (”What is a call/put?”) all the way to a thorough understanding of the assumptions and conclusions of Black-Scholes. The broad introduction to exotic options (Chapter 7 and 8) helped me understand all the basics of exotics, how they’re priced, and their characteristics. I particularly got a far better appreciation for the role of gamma in the P&L of exotics.

Some good quotes:
1. “Every time you are offered a job for which there exist other equally good candidates, every time you choose to eat healthier and exercise more, every time you discover a shorter route home—that is arbitrage, and you are the arbitrageur. If it weren't for arbitrage, if we honestly believed there is no way to make your life better, what would be the point of living?” (21).

2. “If Hillel were a trader today, and a non-trader were to ask him to teach him all there is about financial hacking while standing on one foot, I imagine Hillel might answer something like this: “Accumulate risks that are hateful to others; dispose of risks that are hateful to you. That is the whole of financial hacking; the rest is commentary. Now go and trade,” (25).

3. “Finance is not about looking up the formula and plugging in numbers. It is about logic and quick thinking an intuition,” (182).

4. “The big intuitive insight from put-call parity is that it doesn't matter whether you trade in puts or in calls: the two are in some deep sense identical, despite their surface differences. Optionality is the key. The kink is the key,” (55).
20 reviews1 follower
September 4, 2024
Amazing book on exploring derivatives through simulations. Highly recommend. It walks you through how to answer questions about derivatives using Wolfram Mathematica in a simulation and visualization first manner. Great for building your intuition.

Part III seems out of place, but even ignoring it’s existence justifies a five star rating.
Displaying 1 - 6 of 6 reviews

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