An Introduction to the Mathematics of Financial Derivatives

One the best text books for beginners. It explains abstract mathematical theories with easy to understand language and examples. For example, one does not need to have advanced math background to understand chapter 14 which covers Equivalent Martingale Measures (the Girsanov Theorem) and chapter 24 which covers stopping time for American options. Chapter 24 is especially interesting in the sense that it uses simple theory and example to layout steps one can use to determine the optimal (best) time to exercise American options. The new chapters 22 (Pricing Derivatives via Fourier Transform Technique), 23 (Credit Spread and Credit Derivatives) and 25 (Overviews of Calibration and Estimation Techniques) are great addition to the previous (second) edition. Chapters 22 and 25 introduce more advanced methods and models for pricing and predicting future prices for derivative products. Chapter 23 gives an in-depth introduction to credit derivative.

I'm a Finance/MBA grad student. Bought the second edition for $8 off eBay. It pairs really well as an extension of Mathematics for Finance, which I got for $11. Solid book overall

Full of typos.. Even equation numbers referred to in the text is not correct at many places, leading me to guess the intent. The book is good, but these typos and errors make it harder to read. An explicit errata for this book is awaited.

Bottom line: awfully written and not didactic AT ALL. Content is good, but it's very confusing. They mention concepts before they are introduced, leaving you to guess / research what they mean. Besides, they are very bad at introducing / explaining these new concepts.Finally, there are many errors, be it typos (specially inside equations) or simply bad English. I strongly recommend you buy another book on the subject.

The bad news is that this is really not that different from the second edition, which is good news: you can still use a LOT of the older solutions manual with this OR get the second without too much harm done, for about 40 bucks US used. More importantly, the web is filled with criticism that it is hard to access Neftci and that he's behind on communication and the web site. Frankly, I lay this on the publisher, not the author, and to be fair, these derivative guys make 7 figures so I'm personally grateful he even took the time to get this done, including the updates that are here! I teach dynamical systems online, and this is one of the finest texts you'll ever find for intermediate entry. ALL the others are show off pieces that are really postgrad level. Both the second and third use clear explanations and the solutions manual goes to great lengths to make the material intuitive. This field, since Liebniz, has been characterized by four techniques: analytical, qualitative (eg graphs and topology) and numeric (algorithms). The recently added pesky little sister is stochastics-- using distributions in deterministic, zero sum systems was unheard of historically in dynamical systems. To be very frank, not much has changed between 2000 (2E) and now (3 edition) in the field of partial differential equations for betting itself. The two things that have evolved are mathcad and mathematica modeling (which aren't covered in either due to SAS clones, GNU Octave, and expensive derivative models, often proprietary to the bank) and the probability side. Stochastics are covered in both, but again honestly, the new edition doesn't have a lot more of the most recent developments in Martingales, for example, including a lot of Taleb black swan and distribution research and options. The key point is that this book is a unique black swan itself-- an outlier, and rare by math standards. The models used in this field are every bit as robust as Hamitonians and Lagrangians in Quantum Physics and Engineering (my fields), so a text that takes the time to work on the intuitive detail side is indeed a find. Still, undergrad calculus is not enough unless it was taken in an Engineering or Physics track-- the assumption is that you are comfortable with PDEs, matrices, vectors, etc. As I'm sure you know, many of the solutions in this field are not generalizable, if you've seen one, you've seen one. More and more, proprietary numerical methods are merging with stochastics to model these products. Even as simple a concept of doubling down vs. various utility functions gets into "airfoil design" level modeling, which themselves don't have analytic solutions! Highly recommended as one of the few that aren't a torment, by an author who is more interested in your comprehension than showing off his stuff.

How I wish this book be banned from reading or taken off shelves until the author has corrected all the typos and confusing proofs. It could have been an excellent book on the subject for students starting into this field of study.

I was hoping that this book, written by a high level finance quant- Ali Hirsa, would have added many more details and examples to the existing topics already in the 2nd edition of the book. But the third edition just adds some modern topics, but adds only a little more material to a few existing chapters in the 2nd edition to make the book slightly more useful as an INTRODUCTION to the Mathematics of Financial Derivatives. Also this new edition modernizes some notation in one paragraph , however the editors do a half donkey job... because, in a subsequent paragraph the old notation was not replaced... making the 3rd edition less readable than the second edition. If the author/editor doesn't provide a errata sheet then you have to stick with the 2nd edition written just by the original author, Salih N. Neftci. But since there is some new useful information in the 3rd and I have the 2nd edition without the new typos, that the 3rd edition introduces on the old material, I found this edition useful to have.

There is no need to add to the typo-related comments... Instead, I would like to address the fact that mathematically speaking the book isn’t that rigorous. For instance certain "proofs" rely on THE result to prove the claim (i.e. the result). As an example, equation 9.58 and the statement below eq 9.69, its a lengthy derivation that ends where it had begun. Otherwise it is an excellent effort to explain as easy as possible the topics covered by the book (at least the 2nd edition the 3rd should not be bought.). Of course to follow the book's "easy" explanation you need to be aware and spot the typos which will require a fair knowledge of deterministic calculus. The errata is far from complete.