Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives (Financial Times Series) Paperback – 20 Jul 2012
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About the Author
Satyajit Das is a globally known and respected consultant in the area of financial derivatives and risk management. He is the author of bestselling Traders,Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives and Extreme Money.
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Top Customer Reviews
Where this book excels is in building complexity in line with the chronological retelling of important events, i.e. early on we're introduced to some specific interest rate swaps in the 80s and about 300 pages later we're discussing collateralised debt obligation and their role in the financial meltdown of 2008. This steady pace worked well, even if I was lost at time in some of the details of these complicated instruments.
For those with no financial education, such as myself, it's easy to fall behind by not understanding a concise definition of some derivative and once you do miss something it's not really redefined. Maybe a second reading will help me pick up the things I've missed, but parts of this book are certainly not an easy read and require real concentration. My main criticism would be that the author considers a paragraph explanation sufficient for that concept to be understood throughout the rest of the text.
Criticisms aside, I enjoyed reading this book and it is packed full of thorough explanations and real world examples (possibly too full!).
Highly recommended to anyone who wants to learn about the basics of derivatives and their history as well.
Most Helpful Customer Reviews on Amazon.com (beta)
The book started with an example of an Indonesian firm whose executives signed up complex derivative contracts partially because they were misguided and partially because they had foolishly overlooked the fine points of the complex financial contracts that they were signing. The prologue gave a strong base to the book since it explains that how a simple noodles company can be brought to bankruptcy if it fails to use derivatives wisely.
The example in the Prologue tells us that derivative contracts can be immensely powerful and must be handled carefully. In the coming chapters, Mr. Das has given many examples in the financial world where things went wrong because of the careless use of derivatives. It clearly communicates that derivative contracts should be handled with utter care. Since the prologue communicates the same idea to the readers very effectively through an example, I believe that Mr. Das made a perfect choice in starting his book the way he did.
Chapter 1: Mr. Das starts the first chapter of the book with the proclamation that derivatives are the weapons of mass destruction. In this chapter he gradually introduces his reader to the world of derivatives by giving many practical examples from his own experiences. To justify the name of the chapter he explains in details that what can go wrong when derivatives are used.
Chapter 2: The name of the second chapter is Beautiful Lies which relates to the lies that are being told and sold to the investors by the dealers and the traders. Mr. Das tells the reader that how both the sell side and the buy side believe that they are smarter than the other while both are being wrong to some extent. He also tells the reader about how back office and front office works with each other and what are their respective roles and participants.
Chapter 3: In this chapter, Mr. Das talks about the Buy side of the industry. He used many examples nd case studies to illustrate various concepts like hedging, risk management etc. I believe that what Mr. Das is trying to convey through this chapter is that the buying side should develop an understanding of the contracts that they use before deciding to use them.
Chapter 4: This chapter outlines the primary incentive of the participants of the derivative markets - money. While talking about concepts of pricing and arbitrage, Mr. Das conveys the idea that money minded investors and sellers may become too careless and may get hurt in the process.
Chapter 5: Derivative may lead to high gains and high losses. To ensure a safe position, it is necessary that all the participants try to manage their risk as effectively as possible. The most important part of risk management is the estimation of the risk and evaluation of the ways to control it. This chapter introduces the reader to the concept of risk management and its importance in the real world.
Chapter 6: This chapter talks about the development of the field of financial engineering and the developments inside this area. It tells the readers that how derivative community has spent considerable amount of resources in developing different models and still the models that are being used I the industry are far from perfect. Mr. Das also talks about the cultural war of traders and quants and how their position evolved over time in this business. In this chapter, Mr. Das also gave an example of one of his personal experiences where he almost lost his job because of the model that he was using at the time. This chapter conveys the idea that even though the smartest people in the industry are working to develop various kinds of models in the world of finance, none of these models is perfect. In the end, newton is quoted as - " I can calculate the motion of heavenly bodies but not the madness of people."
Chapter 7: The main topic of this chapter is structured products. Mr. Das tells the reader that how the practice of newly structured and re-structured product dominated the market. He also gave an example of the Orange County which fell victim to these toxic structured products and suffered a loss of $1.5 billion. The given example of Orange County also illustrates the predatory behavior of dealers, traders, and investment banks in the derivative market. Mr. Das talks about the different types of structured products that were used and gave many interesting examples.
Chapter 8: This chapter is mainly divided in two parts. The first part tells the reader about derivative contracts related to equity. In this part Mr. Das tells us about various derivative contracts such as Convertible Bonds, Stock Buyback Options etc. The second part focuses on the efforts that industry participants put in to avoid tax.
Chapter 9: In the last chapter of his book, Mr. Das explained the complex derivative securities such as Credit Default Swaps (CDS) and Collateralized Debt Obligation (CDO) and explained the role that they played in the financial crisis of 2007-08. Mr. Das also explained the chain reaction that led to the crisis and that started with the sub-prime mortgages.
Overall, I believe that Mr. Das has written a very informative book in a very interesting way. His usage of quotes such as - `Eating like chicken, s******* like elephants', made the text even more interesting to read. However, I feel that Mr. Das should also have conveyed some more positive sentiments about the derivative markets to his readers. For the quality of the writing, information provided, and the enhancement of the learning experience, I would give this book a rating of 5/5.
I recommend this book to any potential reader who is interested in learning about derivatives and who wants to get an insight in the inner workings of the derivative markets.
Das takes the reader through several aspects of derivatives: the buy and sell sides, types of derivatives, risk management, and credit risk. Interestingly, the book was written in 2006, pre-recession and credit-crisis. In this edition, there is an Afterword that has an explanation of the crisis through a derivatives-based lens; this is no easy task. There were so many things that went wrong: subprime mortgages, MBS issues, unregulated derivatives and the over-leveraging of credit. In the words of Das, "The risks of a diffuse, globally interlinked, highly leveraged financial system were ignored" (p.398).
A few highlights throughout the book are Das' take on risk management and explanation of the buy-side and sell-side of derivatives. He spins the evolution of each of these areas into a new light, showing how "dazzling" the world of derivatives has become. He claims the sell-side is telling beautiful lies to the sell-side, who is telling true lies. At the beginning of chapter three, Das states, "The buy side thinks they are smarter than the sell side, they think that dealers lie. The sell side thinks that they are smarter than the buy side, they think that clients lie. Clients think that dealer are overpaid... and dealers know that they are paid more than their clients." In my eyes, this is a great summation of both sides of derivatives trading.
Another highlight for me was his discussion of the Asian Currency Crisis throughout the novel, in chapter eight, and then in detail in the Epilogue. When Asia become "hot" with investors, the company could barely sustain the movement of capital in and out of their country. Also, China had become a major place for production due to their inexpensive labor force and cheap production system. The Asian countries had pegged their currencies to the US Dollar, and their currency depreciated greatly, leaving them in a crisis. The convertible bonds for Asian companies had been in US dollars, and no one had thought to hedge that risk. It started with the Thai Baht, and led to other currencies falling 50-80% (p.292). In the end, these countries were left in a bind
Traders, Guns and Money tells many stories, and one in particular regarding risk management. In chapter five, he discusses an early job at Alco where he was supposed to create risk reports within a +/- of 5%. Upon inquiring why this specific 5% was set, his boss returned days later with the answer: "It gives the amount of risk that everybody expects to see" (p.179). This story stuck with me throughout my reading because it embodies the job of so many financial analysts today- they never want to be too shocking and scare their bosses. It's a different frame of mind from a risk manager seeking every possible risk (in another story a woman says she has found 10,000 potential risks for the company). Das's conclusion about risk management was theory was this: "In practice, it seems, common sense isn't that common a all, especially among risk managers" (p.183). In other words, these theorists were relying on old proverbs and uneducated non-mathematical algorithms to determine risk management, which led Das to believe that there was much more to the derivatives universe than this.
Throughout the rest of the book, Das discusses the usual derivatives topics- algorithms, models, quants, structured products; he then concludes with a chapter on credit risk. He covers the credit derivatives boom of the 1990s and the evolution of CDS and CDOs. These are means of selling off the risk that the company does not want exposure to. I particularly enjoyed his coverage of "Tranche Warfare" in chapter nine, where he discusses different levels of payouts in the event of default. Mezzanine investors have always been a bit of a mystery to me, but the explanation here is quite good. Basically, they are receiving a higher payout- but not first payout- in the event of default. This is an important concept to cover, especially because of the recent real estate crisis that left mezzanine investors and regular investors bankrupt. The explanation of tranching is that not all investors are equal in a default situation.
Overall, Traders, Guns ad Money was an accurate representation of the derivatives market, which, to be fair, is a convoluted minefield. I was not a fan of Das's writing style, as aforementioned. The vulgarity and overuse of stories made the book less effective overall. It lacked finesse and some necessary editing throughout. The scattered writing with story-after-story made reading difficult. I would have enjoyed more meat and potatoes; at times it seemed overly superfluous in story telling. However, his coverage of credit risk and the Asian Currency Crisis in 1998 were extremely well written. The Asian crisis in particular really fascinates me, so this was a particularly interesting part in my opinion. I also enjoyed his thoughts on the Orange County mismanagement and other issues. It is a good read for someone interested in learning more about derivative securities, as well as a light read for an already experienced derivatives trader.