Kellogg School professor leading the way
in derivatives research
By Deborah Leigh Wood
Derivatives Markets, written by Kellogg School Finance
McDonald, has been adopted by business schools
worldwide, and for good reason: It's the only text out there
that provides finance students with an economic perspective
In addition to being used at the Kellogg School, Derivatives
Markets (Addison Wesley, 2002) is required reading
in courses at the University of Chicago Graduate School
of Business, the Harvard Business School, the Wharton School
at the University of Pennsylvania, the London Business
School, Princeton University, the University of Illinois
at Urbana-Champaign, Boston College, Boston University
and universities in Australia, Canada, New Zealand and
McDonald, the Erwin P. Nemmers Distinguished Professor
of Finance at the Kellogg School, decided to write the book
after becoming dissatisfied with existing texts on derivatives
--- financial instruments whose value is based on other securities
such as options, futures and swaps.
Specifically aimed at the MBA student, Derivatives Markets "has
more examples and more illustrations of use," McDonald says. "It
explains what's behind the math." Derivatives courses are
an essential aspect of modern finance, he says, particularly
for students interested in areas where derivatives are important,
such as investment banking, commercial banking, management
consulting and investment consulting.
A. Korajczyk, Kellogg School senior associate dean for
curriculum and teaching, calls McDonald "a pioneer in
developing option pricing theory" in situations different
from those applicable to exchange-traded options. This area
of research has come to be known as "Real Options Theory."
"The problems that Bob's research addresses require a greater
grounding in economic analysis than do standard problems," says
grounding in economics carries over to Derivative
Markets in that the book does a wonderful job of teaching
the reader the economic intuition of derivatives markets
in addition to the mathematics of derivative pricing," Korajczyk
says. "This allows the reader to answer the 'why' questions
in addition to the 'how' questions."
says he's "gratified at all the positive feedback" he
has received from peers at other business schools who also
noticed the "gap" in derivatives texts. He attributes this
gap in part to the relative newness of the derivatives market.
In Chicago, options trading began in 1973 with the introduction
of the Chicago Board of Options. Prior to that, options transactions
were handled over the phone by stockbrokers.
academic institutions started offering courses on the
derivatives market in the 1980s, so textbooks are "still
evolving," McDonald says, and so is the derivatives market
itself. In addition to stock, interest rate, commodity and
exchange rate risk, it is now also possible to trade risks
related to weather and unemployment statistics.
says he finds the field of derivatives fascinating and
fun because it "blends economic theory and practice and
offers an analytical framework with widespread applicability