I have to say that I was prepared to dislike this book before I even started flipping pages. It was recommended to me by some of my consulting colleagues who are less than familiar with the world of derivatives on the basis that it had few diagrams in it "and hardly any maths". This is not to say that I am that dull that I can't read a book unless it contains binomial equations (although I do keep a copy of Fabozzi in the loo - but that is more to stop guests spending hours in the toilet when they visit) - but more because the blurb on the back pages seemed to suggest that this was a tabloid-esque expose of the "..soft underbelly of the world of derivatives...". Well, more fool me...
Written under the aegis that this was a "fictional" autobiography (the names have been changed to protect the guilty) Das writes about his long career in the financial world with insight, glee, and with more than a healthy dose of cynicism. Having worked both in the investment banking world and as a Treasurer on the buy side he has a unique, studiously objective view of the industry and imparts that to the reader through a serious of often very amusing vignettes that explain the workings of both the industry and the instruments involved.
As with all derivatives books there are the usual narratives on the blockbusting stories of derivatives (Orange County, Barings, LTCM etc) but these are told with less sensationalism and more explanation of the root causes and effects than is usual with this type of finance book. Throughout Das does a fabulous job in explaining to the layman the structures, strategies and processes involved in the trading of contracts - whilst also laying bare the plain truths that (unless you are a dealer engineering the product and taking your cut) that actually making money from these things, or even using them as an efficient hedge is a lot harder than is made out.
Throughout Das utilises Donald Rumsfields insightful, if slightly confusing statement about the Iraq war and the eponymous Weapons of Mass Destruction (WMDs) "...As we know, there are known knowns. There are things we know we know.
We also know there are known unknowns. That is to say we know there
are some things we do not know. But there are also unknown unknowns,
the ones we don't know we don't know....". And as Das (and Warren Buffet) point out Derivatives sit very neatly into this statement. They are a "known known" - known to be dangerous (a WMD) as the many examples of financial disaster involving them bear witness to - but their use was a "known unknown" for if such disasters were anything to go by then why were people still using them in such ever increasing volumes? Similarly they are an "unknown known" - their very essence meaning that they inspire greed and feed off fear. People use them to either try to make money or to protest themselves against the risk of financial loss but as Das points out "frequently they confuse the two". Users often jumped onto bandwagons (cf Portfolio Insurance) for fear of losing out on a sure thing, and this also holds true for the dealers. As for the "unknown unknowns" well that is actually what Das tries to explain by narrating the stories and explaining the often unforeseen effects of trading derivatives.
If you are new to the world of derivatives, and especially if you are considering a career in investment banking then I strongly suggest that you read this book. Even if you just need a primer on instrument structures and strategies and are bored of the bland formulaic and abundant text books then I think this book will make a welcome, but nonetheless fulfilling alternative.
