A Course in Derivative Securities: Introduction to Theory and Computation

Springer: Berlin, 2005

This is a textbook for a second course in derivatives at the undergraduate or MBA level or for a first course in a financial engineering program.  It aims at a middle ground between the introductory books on derivative securities and those that provide advanced mathematical treatments. It is written for mathematically capable students who have not necessarily had prior exposure to probability theory, stochastic calculus, or computer programming. It provides derivations of pricing and hedging formulas (using the probabilistic change of numeraire technique) for standard options, exchange options, options on forwards and futures, quanto options, exotic options, caps, floors and swaptions, as well as VBA code implementing the formulas. It also contains an introduction to Monte Carlo, binomial models, and finite-difference methods.

The option pricing functions in the book (including worksheet examples and the VBA source code) are available in this Excel workbook. Here is the data for Problem 3.9, and here is an errata. Solutions and slides are available for adopting instructors through Springer.

A Course in Derivative Securities was selected by riskbook.com as one of the top ten finance books of 2005.  According to the review at riskbook.com, "this book is an outstanding portal to the mathematics of financial engineering as it is practiced today." 

Here are some recommendations from distinguished people in the field:

"Professor Back has written a superb book on advanced derivatives. The book provides wonderfully clear explanations without sacrificing mathematical accuracy. I highly recommend this book for everyone who wants to understand more about this fascinating and important area." Mark Broadie, Columbia University, New York.

“Professor Kerry Back's book fills a void in the derivative literature by providing an excellent and much needed book for a second course in derivatives. The clear presentation and the choice of VBA as the software tool makes this a perfect textbook for such a course. Using VBA via Excel is an excellent choice as it exhibits an 'open source' environment that is available for users." Eliezer Z. Prisman, York University, Toronto.