Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups 2nd edition, Stuart C. Gilson

"With the number of corporate bond defaults up sharply over the lows of the middle-to-late 1990s, Creating Value through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups (John Wiley & Sons, Inc.) is reaching the market at an apt moment. The book, which is written by Harvard Business School Professor Stuart Gilson, employs the case study method to examine the restructuring of the claims of creditors, shareholders, and employees. Of greatest interest to high yield and distressed investors is the section on financial distress, which studies such familiar companies as Continental Airlines, Flagstar Companies, The Loewen Group, and National Convenience Stores. Gilson also provides a market survey of distressed investing, exploring such nuances as prepackaged bankruptcy, "bondmail" (gaining control of a class of debt to block approval of a reorganization plan), exit strategies, tax issues, and disqualification of votes on a bankruptcy reorganization plan. Creating Value through Corporate Restructuring also addresses company overhauls that occur outside the context of potential or actual bankruptcy. Techniques include issuance of tracking stock, spin-offs, layoffs, plant closings, revisions of employee retirement benefits, and mergers. Gilson maintains a global perspective, incorporating cases not only from the United States, but also from Germany and Thailand."-- High Yield, a Merrill publication by Marty Fridson

"... Stuart Gilson, of the Harvard Business School, has managed to write a book important to everybody in the distressed market that is also quite enjoyable. His prose is fluid and succinct and a pleasure to read. . . The text covers 13 corporate restructurings focusing on debt workouts, vulture investing, equity spinoffs, tracking stock, asset divestitures, employee layoffs, corporate downsizing, M & A, HLTs, wage give-backs, employee stock buyouts, and the restructuring of employee benefit plans. . . . this is an especially valuable text for anybody working in the distressed market." (Turnarounds & Workouts Magazine, Review by David M. Henderson)

Gilson's book provides a meaningful framework for analyzing any restructuring and a guide to various tools and additional references....Detailed exhibits at the end of each chapter provide the hard, quantifiable financial and industry data that management and stakeholders must interpret to plan, negotiate, and execute a restructuring. The exhibits are especially insightful and provide examples of alternatives for presenting relevant factual information on complex restructurings. (The Journal of Corporate Renewal) --This text refers to an out of print or unavailable edition of this title.

This book is exceptional. It starts with providing the reader with the basics of distressed situations: the parties involved in restructuring, academic research regarding investment returns, the bankruptcy process, etc.

The remainder of the book in primarily composed of case studies grouped into three categories (1) liability restructuring, (2) asset/equity restructuring, and (3) restructuring employee's claims. The cases are exceptionally well written.

Many reviewers complain that the book would be better with a supplement that discusses "solutions" to the cases. I agree, those would be nice to have. However, the author uses his book to conduct his Harvard MBA course on restructuring. The value of the cases would obviously be compromised if answers were released. Maybe he will do so when he retires.

For those interested in restructuring, the following is a list of my favorite books organized by subject area.

Bankruptcy process:
1. The Executive Guide to Corporate Bankruptcy - Legal text with comprehensive coverage on the bankruptcy process

Strategies of distressed investors:
1. The Art of Distressed M&A - Good book for strategic buyers who want to purchase the company or a business unit prior to bankruptcy or through a section 363 transaction during bankruptcy
2. Distressed Debt Analysis - Good book for hedge fund managers who are looking to purchase distressed debt usually to extract short-term profits. Structural arbitrage is only briefly discussed.

Turnaround Management:
1. Corporate Recovery - Discusses how to turnaround companies nearing, but not in, bankruptcy
2. Corporate Turnaround - Discusses how to turnaround companies nearing, but not in, bankruptcy

Accounting for Restructuring:
Advanced Accounting by Hoyle, Schaefer, Doupnik - Excellent coverage of fresh start accounting and NOL preservation. Note that only one chapter in the book covers bankruptcy accounting but this will be the same for all advanced accounting texts.

Note, Principles of Corporate Renewal and The Vulture Investors are supposed to good as well but I have not read them yet.

Someone (perhaps it was I) has said that bankruptcy is corporate finance with negative signs. This has always been true but it is amazing how far mainstream finance has gone to try to resist the comparison. The resistance must be, must have been more cultural than economic, because it is axiomatic that anything is a bargain at the right price, and that there is no more or less money to be made in "distress investing" than in any other. Two generations ago, there seems to have been only one person in American that really understood this point - the late Max Heine, who made his grubstake by investing in out-of-favor railroad bonds in the Great Depression, and then riding the wave of prosperity that emerged in World War II. In the same vein, 40 years ago just about any bankruptcy judge would have looked on an "assigned claim" as some kind of monster.

Times have changed. Now everybody's an arbitrageur. The "vulture investors" have their conferences, their social clubs, and for all I know, their own softball team.

Stuart C. Gilson"s "Corporate Restructuring" symbolizes the sea change from the old attitude to the new. It adds the imprimatur of the Harvard Business School to the notion that vulture investing is just another way of making money. As others have noted, this isn't a work of high theory - indeed it has a kind of slapdash, direct-off-the-photocopier feel that is remarkably common in business publications. For fancy theory, you look elsewhere - in law to the likes of Douglas Baird or Lucian Arye Bebchuk; in finance to the developing lore of "real options." But the case studies are an excellent device for getting a sense of the texture and possibilities of vulture investing. It can be read with profit alongside Hilary Rosenberg's "The Vulture Investors." Ambitious students who want the full theoretical framework will match it with David G. Luenberger's "Investment Science." But Gilson's work has merit on its own as one kind of introduction to this revolution in investment thinking.

You'd be surprised by how few business schools offer courses on bankruptcy and restructuring. I know that I was. I came to Wharton this year to teach "Advanced Corporate Finance" in the MBA program. In preliminary "due diligence," I discovered there were no finance electives on bankruptcy and restructuring. To bridge the gap, I decided to conclude my course with two modules, one on Corporate Restructuring and the other on Bankruptcy.

Material for both modules came straight from Gilson's book. Students relished the case studies. They fueled many of the most lively and engaging discussions we enjoyed all term. Students are worried about the economy. For the first time, many also sense career opportunities in the area of distressed debt. When I planned the course, I counted on both to spur interest in the modules.

What I didn't count on was how well Gilson's cases would frame virtually all other material that I covered. Key lessons resurfaced from all modules: Financial Analysis and Forecasting, Capital Structure Policy, Capital Budgeting, and Mergers and Acquisitions. In each case, revisiting the ideas in the context of bankruptcy and restructuring threw them into high relief. So much so that I was able to substitute restructuring cases for those I had intended as "comprehensive" case discussions.

As important for educators, Gilson's cases provide all necessary background information about how key legal and procedural aspects of the Bankruptcy Code influence managers' decisions. In Gilson's cases, the decisions featured are crucial to determining how to maximize value in distressed situations, as well as how to distribute it when all is said and done.

In the final analysis, aren't these *exactly* the issues that MBA courses in corporate finance should address? My students at Wharton this term sure thought so. In the spring, my two sections are also already full. I've been told the "buzz" is mostly due to Gilson's restructuring material. Hopefully, some value was created in the delivery. Nonetheless, I couldn't recommend any material more highly for anyone planning to teach a spring term corporate finance course.

This is a TERRIFIC book, but it is a collection of terrific case studies and by that I mean the kind of case studies you would use in an MBA program. There are no conclusions drawn or analysis of the case or even questions to think about. There is also no follow up on the corporations included and how their plans were actually implemented or if they survived.

However, the cases are divided up into three parts and each part has a short essay that introductes the general theme for the cases and offers a paragraph summary of each case. There is also a reding list of academic papers and books that can be used to delve deeper on that parts topic. This does add real value to this book.

Just like in b-school, you are expected to dig, dig, dig. And this is a good thing. Don't get me wrong. You will learn more by asking yourself questions about what all the information means. And if you are an experienced case reader you will pretty much know what you should go after. And these cases have a extremely useful financials associated with them (analyzing these is where the real payoff is). You can do a lot of the follow up on your own by digging through Internet resources such as WSJ, Yahoo, and Hoovers, etc.

Just don't expect any easy conclusions in the book because it is designed for use in class so all of the conclusions have to be held back or the cases become useless for teaching. However, since discussion of cases is the best place to get new insights above your own analysis, it would be GREAT if the publisher or the author put up a website where purchasers of this book could discuss the cases with each other.

Maybe this would be the same problem as publishing analysis. However, my only frustration with this wonderful book is that even though I have gotten a great deal from it and will continue to benefit from it as a resource text for years to come, I KNOW I could get more out of it by discussing it with others. Each of these cases would be terrific for class use.

The cases are all five star. I gave the book four stars only because of my personal frustrations in not being able to get other discussion about the cases and because of its very specialized topic. If you are interested in this topic and understand what cases are and are not - then for you this is a five star book.

Product Details :
Hardcover: 848 pages
Publisher: Wiley; 2 edition (April 5, 2010)
Language: English
ISBN-10: 0470503521
ISBN-13: 978-0470503522
Product Dimensions: 6.3 x 1.6 x 9 inches

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High Probability Trading Strategies: Entry to Exit Tactics for the Forex, Futures, and Stock Markets 1st edition, Robert C. Miner

Before we get started, if you are looking for a mechanical trading system, give this book a pass.

The author presents four very useful tools for trading stocks, commodities, or currencies. These are: two time-frame momentum indicators, Elliott waves, Fibonacci with price, and Fibonacci with time. You can use these four tools as a discretionary trading system, but the Fibonacci discussion is especially valuable in and of itself. The author has been around 20 years providing trading advice - an indication of some quality.

I appreciate that the author isn't trying to hard sell his software and newsletter. You can apply the ideas in the book without buying anything more from the author! That is an honest touch that is appreciated. Still the author sells a software package that make things slightly easier, I would imagine. UPDATE: Many people comment negatively that the book is just a sales pitch for the software. Since the book discloses all the four tools, I think such a statement is untrue. However, some of the tool will require you to print out the charts and do manual calculations if you don't have his software.

The style of the text can be somewhat annoying at times; it is repetitive and has too many comments about not-so-good advisors out there somewhere. (No need for the author to point this out unless he wants to name the offenders.) It would have been good if the author told the reader how this book compares to his earlier book Dynamic Trading: Dynamic Concepts in Time, Price & Pattern Analysis With Practical Strategies for Traders & Investors. My take is that the current book introduces the two time-frame momentum and streamlines the other information on Elliott and Fibonacci, but it would have been useful to get this information from the author. Is the previous book superceded in his mind or does it still have value?

All positive reviewers (13 of them at the time of writing) have only reviewed this book and nothing else. Clearly the author has a fan club. Irrespective, I can really this book. I am not part of the fan club and I try to give out as many one star and five star reviews.

do not think that this book will make you a more successful trader by simply following a set of hard-and-fast rules. It will give you some interesting ideas to kick around in your head and try out on your own trades. If you want to save yourself the trouble of reading the book, here are its key points, in a nutshell: 1.) Graph momentum below your stock charts and know what the Oversold/Overbought lines mean and where they are. 2.) Learn about Fibonacci Retracements and learn how to set them on your main stock chart, superimposed over your graph lines. 3.) Know how to set stops that will only drain your account up to 3% if the market heads the wrong way after your entrance point. If you master those points and tangential topics that go with them pertaining to money management and trading mindset, you will have the book pretty much down pat and be able to do your own prognosticating. Remember, though, anyone, and I mean ANYONE, can do after-the-fact "prognosticating" with historical charts in hand, and then fiddle around until a "system" is found that can fit that data. Once Miner starts getting into the charts and logic of his system, anyone who has a taken probability and statistics in school will see that a little fun is afoot. It simply is "mathematical justification voodoo" at its best. To give Miner his due, he freely admits that you will never win all of the time. He even says you will most likely lose a great deal, and gives the stats on what percentage of traders go bust after just their first six months (variously 70-95%!). I was struck, though, about half-way through the book, that all of Miner's complicated systems analysis charts, and such, exist to help sell his software and trading services, although he comes off, in so many words, like that is not the case. I don't believe it, for one minute. He mentions "proprietary" data analysis in his software that his company uses, and you can bet the farm that he is baiting you to pop big bucks for that. Another thing, the charts in this book are terrible, as it is tough to clearly make out, in many cases, what Miner is trying to illustrate, and they are discussed on pages other than the ones on which they appear. Talk about frustrating! In the end, this book is similar to many others. It is written by a clever guy who has taken to heart the old, familiar words of PT Barnum, which you should know, as I'm not telling you, here. You can read it, get frustrated, figure, "Oh what the heck. I'll just buy his software and let it make me millions!" BUZZZZZZ! Wrong thought. What the software will do, according to those who have bought it and discussed it online, is to relieve you of your hard-earned money, and little else. It does not, according to the same folks, give you definite entrance and exit points, at all. In closing, ponder this, as with all other folks who write these types of books, if Miner was the trading Guru he seems to come off as in this book, his protests to the contrary, why would he need to do anything other than sit at home, in his mansion, and make trades all day? With him being the absolute master of his own system, he should make billions, literally. He doesn't, though, from trading, and neither will you. UPDATE: I have been experimenting with Miner's system and, by pure serendipity, made this discovery: If you are looking at 1-minute charts on one screen, and 5-minute charts on another, for the same, exact stock, guess what----Momentum may be exactly opposite on the two charts! In other words, the 1-minute chart may show you that a stock is overbought and, thus, ripe for a short position, while on the 5-minute chart the stock is shown as oversold and, thus, ready for a long position. I understand that this can be spun to make sense if one counters by saying: "Well, it all depends on if you're making one or five minute turnarounds, and considering one-day or five-day charts." Thing is, it just has a bad "feel" to it. To me, it simply is another indication that Miner's system mumbo-jumbo is just that: Complex-sounding permutations applied to very basic trading tools, put together in such a way that you become convinced that you absolutely need his support materials to succeed in trading. Please consider everything I've said in the above and read other reviews on here before you fork over your cash, and/or jump into trading. Good luck! Update 11/15/10: In this book you are advised to not trade when momentum charting clearly indicates highly overbought/oversold trades. FWIW, I have found that selling/buying at precisely those times leads to consistent success. I have had very few losing trades following my own strategy. Of course, find what works for you.

This is a good book as a general reminder but for the more advanced trader it just repeats what a majority of us already know
My summary with some of my own thoughts:
learn the concept of price action and study it for a long time prior to starting trading. Map out your risks and profits point prior to executing. Learn how to read the trading dime, this is the box on your screen that comes with the trading software you have. It shows you the price and on the left side it will show the amount of contracts being sold, and on the right the amount being bought.
I trade e-mini futures primarily sp500. Keep in mind 1min and 5 min chart having different overbought and oversold levels which is something that can be highly advantageous once learnt. If you find your scalping trades on a 1 min chart are not working then try and zoom out your focus to a 5 or 10min chart to play longer trm trends in which the momentums direction is clearer. I try not to use the minute charts because it does not give me clear picture of the sentiment via volatility. Try and use a tick chart in conjunction with a minute chart. Tick charts are useful because each bar or candle represent a certain amount of contracts traded. I use a 1000 tick chart with 5000 tick chart on another screen. The 1000 tick is useful because it gives your entry point while the 5000 provides some context as to where the subtrend your trading is in the overall larger trend. Included with those I follow the 60 min chart t see where we are in the context of the last few days.

Give yourself some practical rules. Don't trade after a lage move, don't trade after a lage move down. Give the market time to consolidate otherwise your not trading but rather guessing the direction of the trade. If it looks like the market is going to breakout after consolidation wait for the market to retest your levels. If your levels hold then go with it. You won't make as much money but your not going for home runs. You want to take the smaller profit and be consistent. Thus you have the opportunity to stay in the game and take advantage of the next trade.

If you missed your entry point then don't try and convince yourself to take it anyway. Stop and reevaluate the next levels because chances are once you missed your entry the trade is done. Learn to move on...there will always be more opportunities.

I use the awesome oscillator as my primary tool. An example of my strategy: sp500 is tring to touch below 1400 again after attempting the day prior but failing. Is the selling pressure stronger/equal/or weaker than the prior attempt. If the momentum is stronger or equal I take the short. The same ideology works for long positions. Keep in mind it sounds simple but you have to take into account the diversion of the 1000, and 5000 tick in conjunction with your minute charts. tick charts and minute charts are very different so keep that in kind. And learn why they are different:the buying and selling diversion on both types of charts will help you with your entry points.

Write down your levels in the morning prior to trading. When you rush your decision making regarding levels you may get over excited in the process and feel pressured to take a trade you normally would not make. This puts you in a precarious position. If you don't trade well due to a bad entry there is a higher likelihood of you making a poor trade come next execution.

When data is released wait until the market absorbs the data. I tend to give it a few minutes. Sometimes it looks as though it's a definite trend but it can reverse before you can blink your eyes. A breakout will usually test itself before it continues so you will have another chance. Feel free to ask me any question.

Product Details :
Hardcover: 288 pages
Publisher: Wiley; 1 edition (October 20, 2008)
Language: English
ISBN-10: 0470181664
ISBN-13: 978-0470181669
Product Dimensions: 7.4 x 1 x 10.3 inches

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Interest Rate Models - Theory and Practice: With Smile, Inflation and Credit 2nd edition, Damiano Brigo

From the reviews: SHORT BOOK REVIEWS "The text is no doubt my favorite on the subject of interest rate modeling. It perfectly combines mathematical depth, historical perspective and practical relevance. The fact that the authors combine a strong mathematical (finance) background with expert practice knowledge (they both work in a bank) contributes hugely to its format. I also admire the style of writing: at the same time concise and pedagogically fresh. The authors’ applied background allows for numerous comments on why certain models have (or have not) made it in practice. The theory is interwoven with detailed numerical examples…For those who have a sufficiently strong mathematical background, this book is a must." From the reviews of the second edition: "The book ‘Interest Rate Models – Theory and Practice’ provides a wide overview of interest rate modeling in mathematical depth. … The authors found a good approach to present a mathematically demanding area in a very clear, understandable way. The book will most likely become … one of the standard references in the area. … if one were to buy only one book about interest rate models, this would be it." (David Skovmand and Michael Verhofen, Financial Markets and Portfolio Management, Vol. 21 (1), 2007) "This is the book on interest rate models and should proudly stand on the bookshelf of every quantitative finance practitioner and student involved with interest rate models. If you are looking for one reference on interest rate models then look no further as this text will provide you with excellent knowledge in theory and practice. … is simply a must for all. Especially, I would recommend this to students … . Overall, this is by far the best interest rate models book in the market." (Ita Cirovic Donev, MathDL, May, 2007) "This is a very detailed course on interest rate models. Its main goal is to construct some kind of bridge between theory and practice in this field. From one side, the authors would like to help quantitative analysts and advanced traders handle interest-rate derivatives with a sound theoretical apparatus. … Advanced undergraduate students, graduate students and researchers should benefit from reading this book and seeing how some sophisticated mathematics can be used in concrete financial problems." (Yuliya S. Mishura, Zentralblatt MATH, Vol. 1109 (11), 2007)

The modeling of interest rates is now a multi-million dollar business, and this is likely to grow in the years ahead as worries about quantitative easing, government budgets, housing markets, and corporate borrowing have shown no sign of abatement. The approach that the authors take in this book has been branded as too "theoretical" by some, particularly those on the trading floors, or those antithetic to modeling in the first place. The authors though are aware of such reactions to financial modeling, and actually devote the end of the book to a hypothetical conversation between traders and modelers (but omitting some of the vituperation that can occur between these groups). The book is written very well, with calculation steps for the most part included in detail. Since it is a monograph, there are no exercises, but readers will find ample opportunities to fill in some of the calculations or speculate on some of the many questions that the authors list in the beginning to motivate the book. These questions are invaluable for newcomers to the field, or those readers, such as this reviewer, who are not currently involved in financial modeling but are very curious as to the mathematical issues involved. There is also an excellent list of "theoretical" and "practical" questions in the preface that the authors use to motivate the book, along with a detailed summary of upcoming chapters.

The first part of the book sets the tone for the rest of the book, and can be considered as an elementary introduction to the theory of contingent claim valuation. In this discussion the authors focus on a portfolio consisting of riskless security (bond) and a risky security (stock) that pays no dividend. The object is to follow the time evolution of the price of these two securities. The time evolution of the riskless bond is merely exponential, as expected, but that of the risky security is random according to a geometric Brownian motion. The `trading strategy' consists of holding a number of units of each of these securities at each time. All changes in the value of the portfolio can be shown to be entirely due to capital gains, with none resulting from the withdrawal or infusion of cash. The authors refer to this as a `self-financing' strategy, and the initial investment results in a pattern of cash flows that replicates that of a call option. This option is attainable by dealing only in a stock and a bond. This leads to the question as to what class of contingent claims a group of investors can actually attain, where a contingent claim is viewed as a nonnegative random variable which is measurable with respect to a filtration of a probability space. This filtration can be viewed as essentially a collection of events that occur or not depending on the history of the stock price. The bearer will obtain a payment at expiry, the size of which depends on the prior price history.

A contingent claim is said to be `attainable' at a particular price if there exists a self-financing trading strategy, along with an associated market value process that equals the initial prices and equals the contingent claim at expiry. It is shown that every contingent claim is attainable in a complete market. The goal is then to find conditions under which arbitrage is impossible, i.e. conditions that prevent the occurrence of a zero investment and through some trading strategy is able to obtain a positive expected wealth at some time in the future. The authors show that a market is free of arbitrage if and only if there is a martingale measure, and that a market is complete if and only if the martingale measure is unique.

It was primarily the interest of this reviewer in analytical models rather than Monte Carlo simulations, even though there is a thorough discussion of the latter in this book, including the most important topic of the standard error estimation in simulation models. For analytical modeling, the Vasicek model is usually the first one discussed in the literature, and this book is no exception. But the Vasicek model allows negative interest rates and is mean reverting. The authors want to go beyond this model by searching for one that will reproduce any observed term structure of interest rates but that will preserve analytical tractability. One of these, the Cox-Ingersoll-Ross (CIR) model, is analytically tractable and preserves the positivity of the instantaneous short rate. Ample space in the book is devoted to a discussion of this model, which is essentially one where one adds a "square root" to the diffusion coefficient.

Physicists who aspire to become financial engineers may find the discussion on the change of numeraire to be similar to the "change in gauge" in quantum field theory. In the latter, a clever choice of gauge can make calculations a lot easier. The same goes for a choice of numeraire for pricing a contingent claim, and the authors give a detailed overview of what is involved in doing so. Of particular importance in this discussion is the role of the Radon-Nikodym derivative, a concept that arises in measure theory, and also the use of Bayes rule for conditional expectations. To fully appreciate this discussion, if not the entire book, readers will have to have a solid understanding of these concepts along with stochastic calculus and numerical solution of stochastic differential equations.

Interestingly, the authors devote a part of the book to the connection between interest rate models and credit derivatives, wherein they argue that credit derivatives are not only interesting in and of themselves, but that the tools used to model interest rate swaps can be applied to credit default swaps to a large degree. Of particular importance is the appearance of copulas in chapter 21, which have been criticized lately for their alleged role in the "financial crisis". The authors give an overview of these entities for the curious reader but do not use them in the book.

Some readers may find when first exposed to `reduced form models' that they might seem too extreme or judged to be inapplicable because default is viewed as being essentially independent of market observables. Instead default is modeled by an exogenous jump stochastic process. The authors spend a fair amount of time explaining why these models are suitable for credit spreads. In particular, they show that the probability to default after a given time, i.e. the `survival' probability, can be interpreted as a zero coupon bond and the intensities as instantaneous credit spreads. Positive interest short-rate models can therefore be used to do default modeling. The lack of an economic interpretation for the default event is to be contrasted with term structure models, and the authors discuss this in detail.

Structural models on the other hand are tied to economic factors, namely the value of the firm, i.e. its ability to pay back its debt. If this value drops below a certain level, the firm is taken to be insolvent. The authors give a brief overview of structural models, emphasizing their similarities to barrier-free option models, but do not treat them in detail in the book, since they do not have any analogues to interest rate models. For credit risk, the defaultable zero coupon bond is the analog of the zero coupon bond for interest rate curves. The forward rate for credit default swaps also has an analog with LIBOR and SWAP rates. Readers interested in counterparty risk will be exposed to an interesting assertion, namely that the value of a (generic) claim that has counterparty risk is always less than the value of a similar claim whose counterparty has a probability of default equal to zero. The authors give a rigorous formulation of this assertion by proving a general counterparty risk pricing formula.

Poisson processes, used heavily in network modeling and queuing theory, are discussed here in the authors' elaboration of intensity models, along with Cox processes where the intensity is stochastic. Detailed examples are given which illustrate how to use reduced form models and market quotes to estimate default probabilities.
Monte Carlo simulations, which are the bread and butter of financial modeling (along with many other fields of modeling) are used to simulate the default time. The authors address the problem of large variance and the consequent large number of simulations needed if the standard error is just one basis point. Techniques of variance reduction in Monte Carlo simulation are well-known, and the authors discuss one of these, the control variate technique.

Also discussed is a hybrid model where both interest rates and stochastic intensities are involved, and the authors show how to calibrate survival probabilities and discount factors separately when there is no correlation between the interest rates and intensities. The calibration must then be done simultaneously when this is not the case. One is led to ask in this case, and in general, whether interest rate data can serve as a proxy of default calibration, and vice versa. Not really, but the authors do explain how the correlation can be ignored, since it has little impact on credit default swaps.

Ensuring that interest rates remain positive is thought of as an important side constraint by many modelers, who point to the large negative rates that may occur in Gaussian models of interest rates. One model that particularly stands out in this regard is due to B. Flesaker and L. Hughston, and which is discussed in one of the appendices in the book. Their strategy is to enforce positivity via the discount factor, and doing this in such a way so as to eliminate the possibility of "explosions", i.e. situations where the payoff can become infinite in an arbitrarily short time. Their model can essentially be characterized by an integral representation for discount bonds in terms of a family of kernel functions. The members of this family are positive martingales, and this ensures the required positivity. Their behavior under a change of measure involves a ratio called the `state-price density' or `pricing kernel', and this shows that the Flesaker-Hughston model can be interpreted as a general model of interest rates. Arguments are given as to whether all choices of kernel can result in viable interest rate models. Examples are given illustrating that not all can be, but the Flesaker-Hughston model is interesting also in that it does not depend on possibly highly complex systems of stochastic differential equations for interest rate processes. The authors unfortunately do not include a discussion on how to calibrate this model to market data, but instead delegate it to the references.

In the late nineties I went through Brigo's innovative work on stochastic nonlinear filtering with differential geometry techniques. I was favorably impressed by results and style, particularly in his dissertation and in his 'geometry in present day science' very readable overview. Interesting results are found and nicely told with accurate - but not pointlessly complicated - advanced mathematics for the problems at hand, I reasoned.

I've followed a similar path from control to finance, and having worked with interest rate models, I couldn't help but order this Brigo-Mercurio book. I had high expectations 'cause these two guys are working in a bank on the real thing.

Sure enough I'm not disappointed.

1-factor models are handled with great care, a ton of formulas and recipes are given. I've never seen this kind of analysis of pricing with Gaussian 1-f models. The new upgrade of the CIR model is interesting and accurate. "CIR++" is now my favorite 1-f model. I like the treatment of lognormal 1-f models and the explanation of Monte Carlo and trees -- the flow-chart for Bermudan swaptions is crystal clear! Plots of market implied structures and volatility calibration are useful additions.

The chapter on 2-f extensions has one of the best discussions on volatility, and two tons of useful formulas/recipes. Two dimensional trees!

The HJM chapter size is OK. I agree - the useful models embedded in HJM are short rate models and market models.

Market models - these three chapters alone are worth the book. You'll find yourself nodding as you read the guided tour. They make it look easy all the time. The exposition is focused, clear, intuitive, detailed. There's also new stuff, just check the calibration discussion! Smile modeling begins with a brilliant tour and ends with Brigo-Mercurio's new approach - the mixing dynamics - deserving a whole chapter if expanded.

The detailed explanation on products is a much welcome original addition. Cross currency derivatives!

Quotes - as in Brigo's old work - are a pleasant diversion while reading. The 500 and more pages are a treat given the competitive price.

Still there's room for improvements - more "CIR2++"! Something on 3-f models. Historical estimation of the correlation matrix and low-rank optimized approximations. Expand smile modeling! More hedging. Something on structured products. Cross currency libor model. chapter 9 - other interest rate models - sounds out of place and can be suppressed for other things.

This book rings true and has useful teachings for students, academics and practitioners. Although it requires some background in stochastic calculus, it's hard to beat on the pricing front. Kudos to Brigo and Mercurio! It only harms there aren't enough books like this.

Product Details :
Hardcover: 1038 pages
Publisher: Springer; 2nd edition (August 2, 2006)
Language: English
ISBN-10: 3540221492
ISBN-13: 978-3540221494
Product Dimensions: 6.1 x 2.1 x 9.2 inches

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