Every trader has the same fantasy: buy at the absolute lowest price and sell at the absolute highest. You can buy a contract that pays you as if you did. That is the lookback option, Chapter 26.
Asian options are probably the most practical exotic derivatives. In crude oil markets, they are not even considered exotic. They are the vanilla. Chapter 25 applies the framework from Chapter 24 to options whose payoff depends on an average price.
Barrier options showed us weak path dependence. The contract cared about the path, but we still solved a two-variable problem. Chapter 24 takes the next step: strong path dependence. Cannot be hidden in boundary conditions. We need an extra variable.
Barrier options used to be exotic. Now they are one of the most heavily traded option types. Chapter 23 goes deep on them. Simple enough to understand, useful enough to be everywhere, tricky enough to mess up if you do not pay attention.
We have spent a lot of time on vanilla calls and puts. But now Wilmott opens Part Two of the book, and things get interesting. Chapter 22 introduces exotic derivatives, contracts that keep quants employed and traders nervous.
Chapter 21 is short and completely different from everything else in the book. No equations. No theorems. Instead, Wilmott describes a classroom trading game designed to teach option pricing through actual experience. The game was created by one of his former students, David Epstein, and it is surprisingly brilliant in its simplicity.
People have been trying to predict financial markets since markets existed. Chapter 20 of Wilmott’s book takes an honest, slightly skeptical tour through the methods traders use. The verdict? Mixed at best. And Wilmott is not shy about saying so.
Any smart investor, whether a billion-dollar bank or a retiree with a savings account, should know the answer to one question: how much could I lose? Chapter 19 introduces Value at Risk (VaR), the industry standard for answering exactly that.
Up until now in Wilmott’s book, we have been hedging everything. Buy a derivative, hedge with the underlying, pocket risk-free returns. Banks love it. But not everyone plays that game. Fund managers buy and sell assets trying to beat the bank rate. They take risk on purpose. Chapter 18 is about doing that intelligently.
Chapter 17 starts with a confession that always gets Wilmott in trouble with bank training managers. He wants to call his lecture “Investment Lessons from Blackjack and Gambling.” They want him to change the title because regulators might frown on it. Wilmott thinks this is silly. Investment and gambling share the same mathematical roots. And most professional gamblers he knows understand risk and money management better than most risk managers at banks.