Derivatives

Baxter & Rennie Financial Calculus Brief but very good. Covers a lot of material i
n a very short book. Makes you fill in some gaps yourself---and here that is don
e well.
Etheridge A Course in Financial Calculus Patterned after Baxter/Rennie but more ad
vanced.
Musiela & Rutkowski Martingale Methods in Financial Modeling Advanced and very com
plete. Probably more a reference.
Hull Options, Futures and Other Derivatives Probably best first book. Encyclopedic
. Describes a lot of the derivative instruments.
Shreve Stochastic Calculus for Finance I:Binomial Asset Pricing Model Both volumes
very good. A .pdf of original notes is free on Web.
Shreve Stochastic Calculus for Finance II:Continuous Time Model
Hunt, Philip / Kennedy, Joanne Financial Derivatives in Theory and Practice Very g
ood but expensive. Good book to read after getting a quant job.
Interest Rate Models.
Damiano Brigo, Fabio Mercurio Interest Rate Models: Theory and Practice
Weber & James Interest Rate Modelling Very good and complete. There are many other
good books but this is well written and encyclopedic.
Finance (quantitative but broader than Derivatives)
Pliska Introduction to Mathematical Financeiscrete Time Models
Follmer & Schied Stochastic Finance
Statistics [Econometrics]
Pindyck & Rubinfeld Econometric Models & Economic Forecasting Very good but there
are a number of other good books.
Hamilton Time Series Analysis
Probability related to finance
Neftic An Introduction to the Mathematics of Financial Derivatives 2nd Ed. VERY we
ll written; makes everything seem so obvious, you may not realized that you can t
duplicate what he did since you did not even have to think about anything thus do
exercises.
Oksendal Stochastic Differential Equations 5th Ed or later. Brief but very good.
Karatzas & Shreve Brownian Motion & Stochastic Calculus Advanced. More a reference
.
Steele Stochastic Calculus & Financial Applications
Numerical Methods related to Finance
Clewlow & Strickland Implementing Derivative Models
Tavella & Randall Pricing Financial Instruments: Finite Difference Very good, but
big focus on accuracy of methods.
Wilmott, Dewynne & Howison Option Pricing Look for Cambridge not Oxford Press edit
ion---big price difference.
Paul Glasserman Monte Carlo Methods in Financial Engineering
Portfolio
Markowitz Portfolio Selection Old but classic.
Markowitz Mean-Variance Analysis in Portfolio Choice & Capital Markets

1. Stochastic calculus for finance 1 - Shreve

2. stochastic calculus for finance 2 - Shreve
3. Principals of Money, Banking and Financial Markets - Ritter, Silber and Udell
4. C++ Design Patterns and Derivatives Pricing - Joshi
5. A Primer for the Mathematics of Finanacial Engineering - Stefanica
6. The Analysis of Structured Securities: Precise Risk Measurement and Capital A
llocation - Raynes adn Rutledge
7. VAR Understanding and Applying Value at Risk

nce and Financial Engineering, including complex financial derivatives and valua
tions, volatility surfaces and smiles, replication, arbitrage and equilibrium pr
icing models, CAPM, APT, Fama-French models and possibly risk management concept
s depending on the area you ll be supporting.
Statistics and Probability, at a fairly deep level with a good knowledge of dist
ributions, maximum likelihood theory and perhaps empirical distribution fitting,
tests for normality and fitting of joint distribution using tools such as copul
as, how to perform out of sample tests, properties and expectation of random var
iables, correlation and covariance and so on.
Strong mathematics skills in areas including stochastic calculus, including mart
ingales, markov processes (quick! What is the difference between a martingale an
d a markov process?), Ito s lemma and so forth as well as ordinary calculus, diffe
rential equations, numerical methods, linear algebra and possibly a little compu
tational complexity, algorithm analysis and optimization.
Econometrics properties of ARCH, GARCH, detecting the order of an AR/MA process
and so on, stationary and non-stationary variance and how to test and correct fo
r the same if need be, transformations, random walks, unit root tests and so for
th.
Knowledge of several computer packages, operating systems and languages includin
g SAS, S-Plus, R, Matlab; expertise in a programming language such as C++, C# an
d/or Java, and experience with a non-Windows operating systems such as Unix.
Detailed knowledge of capital markets may be required, including understanding o
f credit derivatives, mortgage securities, fixed income and detailed knowledge o
f various interest rate models, depending on where you will be interviewing.
Understanding of simulation techniques such as generating simulations from vario
us distributions and inverse transform theory, details of the Monte Carlo method
and how simulation is used to value various financial instruments (also when yo
u need to simulate as opposed to using other methods), possibly including varian
ce reduction methods; random and pseudo-random number generation techniques, the
pros and cons of various techniques, extreme value theory and so forth.
So where do you go to acquire this knowledge if you don t already have it? Some go
od places to start are with free online MIT courses (and other universities) alr
eady discussed in a previous column. Some of the books that I recommend for your
library include:
Financial Knowledge
You can get a great foundation in most of what you need to get started with John
Hull s book Options, Futures and Other Derivatives available on amazon.com and at o
ther retailers. You can even get a student solution manual.
Financial Engineering
Baruch University professor Dan Stefanica has just come out with a great foundat
ion book for most of what you ll need to know and he has other books planned in th
is series. This type of book has been long needed. There is a solution manual a
vailable as well!
A Primer for the Mathematics of Financial Engineering, Dan Stefanica,
Probability and Statistics
I love the Schaum s series for quick review. They re inexpensive and comprehensive.
There are a number of outlines including:
1) Schaum's Outline of Probability, Random Variables, and Random Processes
2) Schaum's Outline of Probability and Statistics, 3/E
Time Series Analysis
I recommend getting a copy of S-Plus and buying Ruey Tsay s book, Analysis of Fina
ncial Time Series, and working through the examples. Professor Tsay, of the Univ
ersity of Chicago, has a lot of worked examples and solutions from the book on h
is website as well.
There s a great time series book on University of Chicago Professor John Cochrane s
website, and it s completely free:
Monte Carlo Methods
The book by Paul Glasserman of Columbia University, Monte Carlo Methods in Finan
cial Engineering (Stochastic Modelling and Applied Probability), is a classic in
the field.
If you buy these from Amazon, you can also often get a digital edition that you
can view online from any computer.
Stochastic Calculus for Finance
There are a lot of great books for learning stochastic calculus, but you can t go
wrong with Steve Shreve s books:
1) Stochastic Calculus for Finance I: The Binomial Asset Pricing Model
2) Stochastic Calculus for Finance II: Continuous-Time Models
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Stochastic Calculus
1) A Primer for the Mathematics of Financial Engineering, Dan Stefanica,
2) Neftic An Introduction to the Mathematics of Financial Derivatives 2nd Ed.
3) Oksendal Stochastic Differential Equations 5th Ed or later. Brief but very good
.