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Second Edition
DE RI VAT IV ES
PRINCIPLES and PRACTICE
R a n g a r a j a n K . S u n d a ra m
Sanjiv R. Das
Derivatives:
Principles and
Practice
The McGraw-Hill/Irwin Series in Finance, Insurance, and
Real Estate
Stephen A. Ross
Franco Modigliani Professor of Finance and Economics
Sloan School of Management
Massachusetts Institute of Technology
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Eighth Edition
Fourth Edition
Derivatives:
Principles and
Practice
Second Edition
Rangarajan K. Sundaram
Stern School of Business
New York University
New York, NY 10012
Sanjiv R. Das
Leavey School of Business
Santa Clara University
Santa Clara, CA 95053
DERIVATIVES: PRINCIPLES AND PRACTICE, SECOND EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill
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Library of Congress Cataloging-in-Publication Data
Sundaram, Rangarajan K.
Derivatives : principles and practice / Rangarajan K. Sundaram, Sanjiv R.
Das. – Second edition.
pages cm
ISBN 978-0-07-803473-2 (alk. paper)
1. Derivative securities. I. Das, Sanjiv R. (Sanjiv Ranjan) II. Title.
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www.mhhe.com
To my lovely daughter Aditi
and
to the memory of my beautiful wife Urmilla
. . . RKS
To my departed parents
and
Priya and Shikhar
. . . SRD
Brief Contents
Author Biographies xv 18 Exotic Options I: Path-Independent
Preface xvi Options 437
Acknowledgments xxi 19 Exotic Options II: Path-Dependent
Options 467
1 Introduction 1 20 Value-at-Risk 495
21 Convertible Bonds 516
PART ONE 22 Real Options 547
Futures and Forwards 19
2 Futures Markets 21 PART THREE
Swaps 567
3 Pricing Forwards and Futures I:
The Basic Theory 63 23 Interest Rate Swaps and Floating-Rate
Products 569
4 Pricing Forwards and Futures II: Building
on the Foundations 88 24 Equity Swaps 614
5 Hedging with Futures and Forwards 104 25 Currency and Commodity Swaps 632
6 Interest-Rate Forwards and Futures 126
PART FOUR
Interest Rate Modeling 651
PART TWO
Options 155 26 The Term Structure of Interest Rates:
Concepts 653
7 Options Markets 157
27 Estimating the Yield Curve 671
8 Options: Payoffs and Trading
Strategies 173 28 Modeling Term-Structure
Movements 688
9 No-Arbitrage Restrictions on
Option Prices 199 29 Factor Models of the Term Structure 697
10 Early Exercise and Put-Call Parity 216 30 The Heath-Jarrow-Morton and Libor
Market Models 714
11 Option Pricing: A First Pass 231
12 Binomial Option Pricing 261 PART FIVE
13 Implementing Binomial Models 290 Credit Risk 753
14 The Black-Scholes Model 309 31 Credit Derivative Products 755
15 The Mathematics of Black-Scholes 346 32 Structural Models of Default Risk 789
16 Options Modeling: Beyond 33 Reduced-Form Models of
Black-Scholes 359 Default Risk 816
17 Sensitivity Analysis: The Option 34 Modeling Correlated Default 850
“Greeks” 401
vi
Brief Contents vii
Bibliography B-1
Index I-1
The following Web chapters are

available at www.mhhe.com/sd2e:
PART SIX
Computation 1
35 Derivative Pricing with Finite
Differencing 3
36 Derivative Pricing with Monte Carlo
Simulation 23
37 Using Octave 45
Contents
Author Biographies xv 3.8 Futures Prices 75
3.9 Exercises 77
Preface xvi Appendix 3A Compounding Frequency 82
Acknowledgments xxi Appendix 3B Forward and Futures Prices with
Constant Interest Rates 84
Chapter 1 Appendix 3C Rolling Over Futures Contracts 86
Introduction 1
Chapter 4
1.1 Forward and Futures Contracts 5 Pricing Forwards and Futures II: Building
1.2 Options 9 on the Foundations 88
1.3 Swaps 10
1.4 Using Derivatives: Some Comments 12 4.1 Introduction 88
1.5 The Structure of this Book 16 4.2 From Theory to Reality 88
1.6 Exercises 17 4.3 The Implied Repo Rate 92
4.4 Transactions Costs 95
4.5 Forward Prices and Future Spot Prices 96
PART ONE 4.6 Index Arbitrage 97
Futures and Forwards 19 4.7 Exercises 100
Appendix 4A Forward Prices with Convenience
Chapter 2 Yields 103
Futures Markets 21
Chapter 5
2.1 Introduction 21
2.2 The Functioning of Futures Exchanges 23 Hedging with Futures and Forwards 104
2.3 The Standardization of Futures Contracts 32 5.1 Introduction 104
2.4 Closing Out Positions 35 5.2 A Guide to the Main Results 106
2.5 Margin Requirements and Default Risk 37 5.3 The Cash Flow from a Hedged Position 107
2.6 Case Studies in Futures Markets 40 5.4 The Case of No Basis Risk 108
2.7 Exercises 55 5.5 The Minimum-Variance Hedge Ratio 109
Appendix 2A Futures Trading and US Regulation: 5.6 Examples 112
A Brief History 59 5.7 Implementation 114
Appendix 2B Contango, Backwardation, and 5.8 Further Issues in Implementation 115
Rollover Cash Flows 62 5.9 Index Futures and Changing Equity Risk 117
5.10 Fixed-Income Futures and Duration-Based
Chapter 3 Hedging 118
Pricing Forwards and Futures I: The Basic 5.11 Exercises 119
Theory 63 Appendix 5A Derivation of the Optimal Tailed
Hedge Ratio h ∗∗ 124
3.1 Introduction 63
3.2 Pricing Forwards by Replication 64 Chapter 6
3.3 Examples 66
3.4 Forward Pricing on Currencies and Related
Interest-Rate Forwards and Futures 126
Assets 69 6.1 Introduction 126
3.5 Forward-Rate Agreements 72 6.2 Eurodollars and Libor Rates 126
3.6 Concept Check 72 6.3 Forward-Rate Agreements 127
3.7 The Marked-to-Market Value of a Forward 6.4 Eurodollar Futures 133
Contract 73 6.5 Treasury Bond Futures 140
viii
Contents ix
6.6 Treasury Note Futures 144 9.2 Motivating Examples 199

6.7 Treasury Bill Futures 144 9.3 Notation and Other Preliminaries 201
6.8 Duration-Based Hedging 144 9.4 Maximum and Minimum Prices for
6.9 Exercises 147 Options 202
Appendix 6A PVBP-Based Hedging Using 9.5 The Insurance Value of an Option 207
Eurodollar Futures 151 9.6 Option Prices and Contract Parameters 208
Appendix 6B Calculating the Conversion 9.7 Numerical Examples 211
Factor 152 9.8 Exercises 213
Appendix 6C Duration as a Sensitivity
Measure 153 Chapter 10
Appendix 6D The Duration of a Futures Early Exercise and Put-Call Parity 216
Contract 154
10.1 Introduction 216
10.2 A Decomposition of Option Prices 216
PART TWO 10.3 The Optimality of Early Exercise 219
Options 155 10.4 Put-Call Parity 223
10.5 Exercises 229
Chapter 7
Options Markets 157 Chapter 11
7.1 Introduction 157 Option Pricing: A First Pass 231
7.2 Definitions and Terminology 157 11.1 Overview 231
7.3 Options as Financial Insurance 158 11.2 The Binomial Model 232
7.4 Naked Option Positions 160 11.3 Pricing by Replication in a One-Period
7.5 Options as Views on Market Direction Binomial Model 234
and Volatility 164 11.4 Comments 238
7.6 Exercises 167 11.5 Riskless Hedge Portfolios 240
Appendix 7A Options Markets 169 11.6 Pricing Using Risk-Neutral
Probabilities 240
Chapter 8 11.7 The One-Period Model in General
Options: Payoffs and Trading Notation 244
Strategies 173 11.8 The Delta of an Option 245
11.9 An Application: Portfolio Insurance 249
11.10 Exercises 251
8.2 Trading Strategies I: Covered Calls and
Appendix 11A Riskless Hedge Portfolios
Protective Puts 173
and Option Pricing 255
8.3 Trading Strategies II: Spreads 177
Appendix 11B Risk-Neutral Probabilities
8.4 Trading Strategies III: Combinations 185
and Arrow Security Prices 256
8.5 Trading Strategies IV: Other Strategies 188
Appendix 11C The Risk-Neutral Probability,
8.6 Which Strategies Are the Most Widely
No-Arbitrage, and Market
Used? 191
Completeness 257
8.7 The Barings Case 192
Appendix 11D Equivalent Martingale
8.8 Exercises 195
Measures 260
Appendix 8A Asymmetric Butterfly
Spreads 198
Chapter 9
No-Arbitrage Restrictions on
Option Prices 199
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x Contents
Chapter 12 Appendix 14A Further Properties of the

Binomial Option Pricing 261 Black-Scholes Delta 340
Appendix 14B Variance and Volatility Swaps 341
12.2 The Two-Period Binomial Tree 263 Chapter 15
12.3 Pricing Two-Period European Options 264 The Mathematics of Black-Scholes 346
12.4 European Option Pricing in General n-Period
Trees 271 15.1 Introduction 346
12.5 Pricing American Options: Preliminary 15.2 Geometric Brownian Motion Defined 346
Comments 271 15.3 The Black-Scholes Formula via
12.6 American Puts on Non-Dividend-Paying Replication 350
Stocks 272 15.4 The Black-Scholes Formula via Risk-Neutral
12.7 Cash Dividends in the Binomial Tree 274 Pricing 353
12.8 An Alternative Approach to Cash 15.5 The Black-Scholes Formula via CAPM 356
Dividends 278 15.6 Exercises 357
12.9 Dividend Yields in Binomial Trees 282
12.10 Exercises 284
Chapter 16
Appendix 12A A General Representation of Options Modeling:
European Option Prices 287 Beyond Black-Scholes 359
Chapter 13 16.2 Jump-Diffusion Models 360
Implementing Binomial Models 290 16.3 Stochastic Volatility 370
13.1 Introduction 290 16.4 GARCH Models 376
13.2 The Lognormal Distribution 291 16.5 Other Approaches 380
13.3 Binomial Approximations of the 16.6 Implied Binomial Trees/Local Volatility
Lognormal 295 Models 381
13.4 Computer Implementation of the Binomial 16.7 Summary 391
Model 299 16.8 Exercises 391
13.5 Exercises 304 Appendix 16A Program Code for Jump-
Appendix 13A Estimating Historical Diffusions 395
Volatility 307 Appendix 16B Program Code for a Stochastic
Volatility Model 396
Chapter 14 Appendix 16C Heuristic Comments on Option
The Black-Scholes Model 309 Pricing under Stochastic
Volatility
14.1 Introduction 309 See online at www.mhhe.com/sd2e
14.2 Option Pricing in the Black-Scholes Appendix 16D Program Code for Simulating
Setting 311 GARCH Stock Prices
14.3 Remarks on the Formula 315 Distributions 399
14.4 Working with the Formulae I: Plotting Option Appendix 16E Local Volatility Models: The Fourth
Prices 315 Period of the Example
14.5 Working with the Formulae II: Algebraic See online at www.mhhe.com/sd2e
Manipulation 317
14.6 Dividends in the Black-Scholes Model 321 Chapter 17
14.7 Options on Indices, Currencies, Sensitivity Analysis: The Option
and Futures 326 “Greeks” 401
14.8 Testing the Black-Scholes Model: Implied
Volatility 329 17.1 Introduction 401
14.9 The VIX and Its Derivatives 334 17.2 Interpreting the Greeks: A Snapshot
14.10 Exercises 336 View 401
Contents xi
17.3 The Option Delta 405 Chapter 21

17.4 The Option Gamma 409 Convertible Bonds 516
17.5 The Option Theta 415
17.6 The Option Vega 420 21.1 Introduction 516
17.7 The Option Rho 423 21.2 Convertible Bond Terminology 516
17.8 Portfolio Greeks 426 21.3 Main Features of Convertible Bonds 517
17.9 Exercises 429 21.4 Breakeven Analysis 521
Appendix 17A Deriving the Black-Scholes 21.5 Pricing Convertibles: A First Pass 522
Option Greeks 433 21.6 Incorporating Credit Risk 528
21.7 Convertible Greeks 533
21.8 Convertible Arbitrage 540
Chapter 18 21.9 Summary 541
Exotic Options I: Path-Independent 21.10 Exercises 542
Options 437 Appendix 21A Octave Code for the Blended
Discount Rate Valuation Tree 544
18.1 Introduction 437 Appendix 21B Octave Code for the Simplified
18.2 Forward Start Options 439 Das-Sundaram Model 545
18.3 Binary/Digital Options 442
18.4 Chooser Options 447 Chapter 22
18.5 Compound Options 450
Real Options 547
18.6 Exchange Options 455
18.7 Quanto Options 456 22.1 Introduction 547
18.8 Variants on the Exchange 22.2 Preliminary Analysis and Examples 549
Option Theme 458 22.3 A Real Options “Case Study” 553
18.9 Exercises 462 22.4 Creating the State Space 559
22.5 Applications of Real Options 562
22.6 Summary 563
Chapter 19 22.7 Exercises 563
Exotic Options II: Path-Dependent
Options 467 PART THREE
19.1 Path-Dependent Exotic Swaps 567
Options 467
19.2 Barrier Options 467 Chapter 23
19.3 Asian Options 476 Interest Rate Swaps and Floating-Rate
19.4 Lookback Options 482 Products 569
19.5 Cliquets 485
19.6 Shout Options 487 23.1 Introduction 569
19.7 Exercises 489 23.2 Floating-Rate Notes 569
Appendix 19A Barrier Option Pricing 23.3 Interest Rate Swaps 573
Formulae 493 23.4 Uses of Swaps 574
23.5 Swap Payoffs 577
23.6 Valuing and Pricing Swaps 580
Chapter 20 23.7 Extending the Pricing Arguments 586
Value-at-Risk 495 23.8 Case Study: The Procter & Gamble–Bankers
Trust “5/30” Swap 591
20.1 Introduction 495 23.9 Case Study: A Long-Term Capital
20.2 Value-at-Risk 495 Management “Convergence Trade” 595
20.3 Risk Decomposition 502 23.10 Credit Risk and Credit Exposure 597
20.4 Coherent Risk Measures 508 23.11 Hedging Swaps 598
20.5 Exercises 512
xii Contents
23.12 Caps, Floors, and Swaptions 600 27.2 Bootstrapping 671

23.13 The Black Model for Pricing Caps, Floors, 27.3 Splines 673
and Swaptions 605 27.4 Polynomial Splines 674
23.14 Summary 610 27.5 Exponential Splines 677
23.15 Exercises 610 27.6 Implementation Issues with Splines 678
27.7 The Nelson-Siegel-Svensson Approach 678
Chapter 24 27.8 Summary 680
Equity Swaps 614 27.9 Exercises 680
Appendix 27A Bootstrapping by Matrix
24.1 Introduction 614 Inversion 684
24.2 Uses of Equity Swaps 615 Appendix 27B Implementation with Exponential
24.3 Payoffs from Equity Swaps 617 Splines 685
24.4 Valuation and Pricing of Equity Swaps 623
24.5 Summary 629 Chapter 28
24.6 Exercises 629 Modeling Term-Structure Movements 688
Chapter 25 28.1 Introduction 688
28.2 Interest-Rate Modeling versus Equity
Currency and Commodity Swaps 632
Modeling 688
25.1 Introduction 632 28.3 Arbitrage Violations: A Simple
25.2 Currency Swaps 632 Example 689
25.3 Commodity Swaps 643 28.4 “No-Arbitrage” and “Equilibrium”
25.4 Summary 647 Models 691
25.5 Exercises 647 28.5 Summary 694
28.6 Exercises 695
PART FOUR Chapter 29
Interest Rate Modeling 651 Factor Models of the Term Structure 697
Chapter 26 29.1 Overview 697
The Term Structure of Interest Rates: 29.2 The Black-Derman-Toy Model
See online at www.mhhe.com/sd2e
Concepts 653
29.3 The Ho-Lee Model
26.1 Introduction 653 See online at www.mhhe.com/sd2e
26.2 The Yield-to-Maturity 653 29.4 One-Factor Models 698
26.3 The Term Structure of Interest Rates 655 29.5 Multifactor Models 704
26.4 Discount Functions 656 29.6 Affine Factor Models 706
26.5 Zero-Coupon Rates 657 29.7 Summary 709
26.6 Forward Rates 658 29.8 Exercises 709
26.7 Yield-to-Maturity, Zero-Coupon Rates, and Appendix 29A Deriving the Fundamental PDE
Forward Rates 660 in Factor Models 712
26.8 Constructing the Yield-to-Maturity Curve: An
Empirical Illustration 661 Chapter 30
26.9 Summary 665 The Heath-Jarrow-Morton and Libor
26.10 Exercises 665 Market Models 714
Appendix 26A The Raw YTM Data 668
30.1 Overview 714
30.2 The HJM Framework: Preliminary
Chapter 27
Comments 714
Estimating the Yield Curve 671 30.3 A One-Factor HJM Model 716
27.1 Introduction 671 30.4 A Two-Factor HJM Setting 725
Contents xiii
30.5 The HJM Risk-Neutral Drifts: An Algebraic Chapter 33

Derivation 729 Reduced-Form Models of Default Risk 816
30.6 Libor Market Models 732
30.7 Mathematical Excursion: Martingales 733 33.1 Introduction 816
30.8 Libor Rates: Notation 734 33.2 Modeling Default I: Intensity Processes 817
30.9 Risk-Neutral Pricing in the LMM 736 33.3 Modeling Default II: Recovery Rate
30.10 Simulation of the Market Model 740 Conventions 821
30.11 Calibration 740 33.4 The Litterman-Iben Model 823
30.12 Swap Market Models 741 33.5 The Duffie-Singleton Result 828
30.13 Swaptions 743 33.6 Defaultable HJM Models 830
30.14 Summary 744 33.7 Ratings-Based Modeling: The JLT
30.15 Exercises 744 Model 832
Appendix 30A Risk-Neutral Drifts 33.8 An Application of Reduced-Form Models:
and Volatilities in HJM 748 Pricing CDS 840
33.9 Summary 842
33.10 Exercises 842
PART FIVE Appendix 33A Duffie-Singleton
Credit Risk 753 in Discrete Time 846
Appendix 33B Derivation of the Drift-Volatility
Chapter 31 Relationship 847
Credit Derivative Products 755
Chapter 34
31.2 Total Return Swaps 759 Modeling Correlated Default 850
31.3 Credit Spread Options/Forwards 763 34.1 Introduction 850
31.4 Credit Default Swaps 763 34.2 Examples of Correlated Default
31.5 Credit-Linked Notes 772 Products 850
31.6 Correlation Products 775 34.3 Simple Correlated Default Math 852
31.7 Summary 781 34.4 Structural Models Based on
31.8 Exercises 782 Asset Values 855
Appendix 31A The CDS Big Bang 784 34.5 Reduced-Form Models 861
34.6 Multiperiod Correlated Default 862
Chapter 32 34.7 Fast Computation of Credit Portfolio Loss
Structural Models of Default Risk 789 Distributions without Simulation 865
34.8 Copula Functions 868
32.1 Introduction 789 34.9 Top-Down Modeling of Credit
32.2 The Merton (1974) Model 790 Portfolio Loss 880
32.3 Issues in Implementation 799 34.10 Summary 884
32.4 A Practitioner Model 804 34.11 Exercises 885
32.5 Extensions of the Merton Model 806
32.6 Evaluation of the Structural
Bibliography B-1
Model Approach 808
32.7 Summary 810 Index I-1
32.8 Exercises 811
Appendix 32A The Delianedis-Geske
Model 813
xiv Contents
The following Web chapters are

available at www.mhhe.com/sd2e:
PART SIX
Computation 1
Chapter 35
Derivative Pricing with Finite
Differencing 3
35.1 Introduction 3
35.2 Solving Differential Equations 4
35.3 A First Approach to Pricing Equity
Options 7
35.4 Implicit Finite Differencing 13
35.5 The Crank-Nicholson Scheme 17
35.6 Finite Differencing for Term-Structure
Models 19
35.7 Summary 21
35.8 Exercises 22
Chapter 36
Derivative Pricing with Monte Carlo
Simulation 23
36.2 Simulating Normal Random Variables 24
36.3 Bivariate Random Variables 25
36.4 Cholesky Decomposition 25
36.5 Stochastic Processes for Equity Prices 27
36.6 ARCH Models 29
36.7 Interest-Rate Processes 30
36.8 Estimating Historical Volatility for
Equities 32
36.9 Estimating Historical Volatility for Interest
Rates 32
36.10 Path-Dependent Options 33
36.11 Variance Reduction 35
36.12 Monte Carlo for American Options 38
36.13 Summary 42
36.14 Exercises 43
Chapter 37
Using Octave 45
37.1 Some Simple Commands 45
37.2 Regression and Integration 48
37.3 Reading in Data, Sorting, and Finding 50
37.4 Equation Solving 55
37.5 Screenshots 55
Author Biographies
Rangarajan K. (“Raghu”) Sundaram is Professor of Finance at New York Univer-
sity’s Stern School of Business. He was previously a member of the economics faculty
at the University of Rochester. Raghu has an undergraduate degree in economics from
Loyola College, University of Madras; an MBA from the Indian Institute of Management,
Ahmedabad; and a Master’s and Ph.D. in economics from Cornell University. He was co-
editor of the Journal of Derivatives from 2002–2008 and is or has been a member of several
other editorial boards. His research in finance covers a range of areas including agency
problems, executive compensation, derivatives pricing, credit risk and credit derivatives,
and corporate finance. He has also published extensively in mathematical economics, deci-
sion theory, and game theory. His research has appeared in all leading academic journals in
finance and economic theory. The recipient of the Jensen Award and a finalist for the Brattle
Prize for his research in finance, Raghu has also won several teaching awards including, in
2007, the inaugural Distinguished Teaching Award from the Stern School of Business. This
is Raghu’s second book; his first, a Ph.D.-level text titled A First Course in Optimization
Theory, was published by Cambridge University Press.
Sanjiv Das is the William and Janice Terry Professor of Finance at Santa Clara University’s
Leavey School of Business. He previously held faculty appointments as associate professor
at Harvard Business School and UC Berkeley. He holds post-graduate degrees in finance
(M.Phil and Ph.D. from New York University), computer science (M.S. from UC Berkeley),
an MBA from the Indian Institute of Management, Ahmedabad, B.Com in accounting and
economics (University of Bombay, Sydenham College), and is also a qualified cost and
works accountant. He is a senior editor of The Journal of Investment Management, co-
editor of The Journal of Derivatives and the Journal of Financial Services Research, and
associate editor of other academic journals. He worked in the derivatives business in the
Asia-Pacific region as a vice-president at Citibank. His current research interests include
the modeling of default risk, machine learning, social networks, derivatives pricing models,
portfolio theory, and venture capital. He has published over eighty articles in academic
journals, and has won numerous awards for research and teaching. He currently also serves
as a senior fellow at the FDIC Center for Financial Research.
xv
Preface
The two of us have worked together academically for more than a quarter century, first as
graduate students, and then as university faculty. Given our close collaboration, our common
research and teaching interests in the field of derivatives, and the frequent pedagogical
discussions we have had on the subject, this book was perhaps inevitable.
The final product grew out of many sources. About three-fourths of the book was devel-
oped by Raghu from his notes for his derivatives course at New York University as well as
for other academic courses and professional training programs at Credit Suisse, ICICI Bank,
the International Monetary Fund (IMF), Invesco-Great Wall, J.P. Morgan, Merrill Lynch,
the Indian School of Business (ISB), the Institute for Financial Management and Research
(IFMR), and New York University, among other institutions. Other parts were developed
by academic courses and professional training programs taught by Sanjiv at Harvard Uni-
versity, Santa Clara University, the University of California at Berkeley, the ISB, the IFMR,
the IMF, and Citibank, among others. Some chapters were developed specifically for this
book, as were most of the end-of-chapter exercises.
The discussion below provides an overview of the book, emphasizing some of its special
features. We provide too our suggestions for various derivatives courses that may be carved
out of the book.
An Overview of the Contents

The main body of this book is divided into six parts. Parts 1–3 cover, respectively, futures and
forwards; options; and swaps. Part 4 examines term-structure modeling and the pricing of
interest-rate derivatives, while Part 5 is concerned with credit derivatives and the modeling
of credit risk. Part 6 discusses computational issues. A detailed description of the book’s con-
tents is provided in Section 1.5; here, we confine ourselves to a brief overview of each part.
Part 1 examines forward and futures contracts, The topics covered in this span include
the structure and characteristics of futures markets; the pricing of forwards and futures;
hedging with forwards and futures, in particular, the notion of minimum-variance hedging
and its implementation; and interest-rate-dependent forwards and futures, such as forward-
rate agreements or FRAs, eurodollar futures, and Treasury futures contracts.
Part 2, the lengthiest portion of the book, is concerned mainly with options. We begin
with a discussion of option payoffs, the role of volatility, and the use of options in incor-
porating into a portfolio specific views on market direction and/or volatility. Then we turn
our attention to the pricing of options contracts. The binomial and Black-Scholes models
are developed in detail, and several generalizations of these models are examined. From
pricing, we move to hedging and a discussion of the option “greeks,” measures of option
sensitivity to changes in the market environment. Rounding off the pricing and hedging
material, two chapters discuss a wide range of “exotic” options and their behavior.
The remainder of Part 2 focuses on special topics: portfolio measures of risk such as
Value-at-Risk and the notion of risk budgeting, the pricing and hedging of convertible bonds,
and a study of “real” options, optionalities embedded within investment projects.
Part 3 of the book looks at swaps. The uses and pricing of interest rate swaps are
covered in detail, as are equity swaps, currency swaps, and commodity swaps. (Other in-
struments bearing the “swaps” moniker are covered elsewhere in the book. Variance and
volatility swaps are presented in the chapter on Black-Scholes, and credit-default swaps and
xvi
Preface xvii
total-return swaps are examined in the chapter on credit-derivative products.) Also included
in Part 3 is a presentation of caps, floors, and swaptions, and of the “market model” used to
price these instruments.
Part 4 deals with interest-rate modeling. We begin with different notions of the yield
curve, the estimation of the yield curve from market data, and the challenges involved in
modeling movements in the yield curve. We then work our way through factor models of
the yield curve, including several well-known models such as Ho-Lee, Black-Derman-Toy,
Vasicek, Cox-Ingersoll-Ross, and others. A final chapter presents the Heath-Jarrow-Morton
framework, and also that of the Libor and swap market models.
Part 5 deals with credit risk and credit derivatives. An opening chapter provides a
taxonomy of products and their characteristics. The remaining chapters are concerned with
modeling credit risk. Structural models are covered in one chapter, reduced-form models
in the next, and correlated-default modeling in the third.
Part 6, available online at http://www.mhhe.com/sd1e, looks at computational issues.
Finite-differencing and Monte Carlo methods are discussed here. A final chapter provides
a tutorial on the use of Octave, a free software program akin to Matlab, that we use for
illustrative purposes throughout the book.
Background Knowledge
It would be inaccurate to say that this book does not presuppose any knowledge on the
part of the reader, but it is true that it does not presuppose much. A basic knowledge of
financial markets, instruments, and variables (equities, bonds, interest rates, exchange rates,
etc.) will obviously help—indeed, is almost essential. So too will a degree of analytical
preparedness (for example, familiarity with logs and exponents, compounding, present
value computations, basic statistics and probability, the normal distribution, and so on). But
beyond this, not much is required. The book is largely self-contained. The use of advanced
(from the standpoint of an MBA course) mathematical tools, such as stochastic calculus, is
kept to a minimum, and where such concepts are introduced, they are often deviations from
the main narrative that may be avoided if so desired.
What Is Different about This Book?

It has been our experience that the overwhelming majority of students in derivatives courses
go on to become traders, creators of structured products, or other users of derivatives, for
whom a deep conceptual, rather than solely mathematical, understanding of products and
models is required. Happily, the field of derivatives lends itself to such an end: while
it is one of the most mathematically sophisticated areas of finance, it is also possible,
perhaps more so than in any other area of finance, to explain the fundamental principles
underlying derivatives pricing and risk-management in simple-to-understand and relatively
non-mathematical terms. Our book looks to create precisely such a blended approach, one
that is formal and rigorous, yet intuitive and accessible.
To this purpose, a great deal of our effort throughout this book is spent on explaining
what lies behind the formal mathematics of pricing and hedging. How are forward prices
determined? Why does the Black-Scholes formula have the form it does? What is the option
gamma and why is it of such importance to a trader? The option theta? Why do term-structure
models take the approach they do? In particular, what are the subtleties and pitfalls in
modeling term-structure movements? How may equity prices be used to extract default risk
of companies? Debt prices? How does default correlation matter in the pricing of portfolio
credit instruments? Why does it matter in this way? In all of these cases and others throughout
xviii Preface
the book, we use verbal and pictorial expositions, and sometimes simple mathematical
models, to explain the underlying principles before proceeding to a formal analysis.
None of this should be taken to imply that our presentations are informal or mathemati-
cally incomplete. But it is true that we eschew the use of unnecessary mathematics. Where
discrete-time settings can convey the behavior of a model better than continuous-time set-
tings, we resort to such a framework. Where a picture can do the work of a thousand (or even
a hundred) words, we use a picture. And we avoid the presentation of “black box” formulae
to the maximum extent possible. In the few cases where deriving the prices of some deriva-
tives would require the use of advanced mathematics, we spend effort explaining intuitively
the form and behavior of the pricing formula.
To supplement the intuitive and formal presentations, we make extensive use of numerical
examples for illustrative purposes. To enable comparability, the numerical examples are
often built around a common parametrization. For example, in the chapter on option greeks,
a baseline set of parameter values is chosen, and the behavior of each greek is illustrated
using departures from these baselines.
In addition, the book presents several full-length case studies, including some of the most
(in)famous derivatives disasters in history. These include Amaranth, Barings, Long-Term
Capital Management (LTCM), Metallgesellschaft, Procter & Gamble, and others. These
are supplemented by other case studies available on this book’s website, including Ashanti,
Sumitomo, the Son-of-Boss tax shelters, and American International Group (AIG).
Finally, since the best way to learn the theory of derivatives pricing and hedging is by
working through exercises, the book offers a large number of end-of-chapter problems.
These problems are of three types. Some are conceptual, mostly aimed at ensuring the basic
definitions have been understood, but occasionally also involving algebraic manipulations.
The second group comprise numerical exercises, problems that can be solved with a calcu-
lator or a spreadsheet. The last group are programming questions, questions that challenge
the students to write code to implement specific models.
New to this Edition

This edition has been substantially revised and incorporates many additions to and changes
from the earlier one, entirely carried out by the first author. These include
• brief to lengthy discussions of several new case studies (e.g., Aracruz Cellulose’s $1
billion + losses from foreign-exchange derivatives in 2008, Société Générale’s €5 billion
losses from Jérôme Kerviel’s “unauthorized” derivatives trading in 2008, Harvard Uni-
versity’s $1.25 billion losses from swap contracts in 2009–13, the likely structure of the
Goldman Sachs-Greece swap transaction of 2002 that allowed Greece to circumvent EU
restrictions on debt, and others);
• expanded expositions of several key theoretical concepts (such the Black-Scholes for-
mula in Chapter 14);
• detailed discussions of changing market practices (such as the new “dual curve” approach
to swap pricing in Chapter 23 and the credit-event auctions that are hardwired into all
credit-default swap contracts post-2009 in Chapter 31);
• new descriptions of exchange-traded instruments and indices (e.g., the CBoT’s Ultra
T-Bond futures in Chapter 6, the CBOE’s BXM and BXY “covered call” indices in
Chapter 8 or the CBOE’s S&P 500 and VIX digital options in Chapter 18);
• and, of course, thanks to the assistance of students and colleagues, the identification and
correction of typographical errors.
Special thanks to all those who sent in their comments and suggestions on the first edition.
We trust the end-product is more satisfying.
Preface xix
Possible Course Outlines

Figure 1 describes the logical flow of chapters in the book. The book can be used at the
undergraduate and MBA levels as the text for a first course in derivatives; for a second (or
advanced) course in derivatives; for a “topics” course in derivatives (as a follow-up to a first
course); and for a fixed-income and/or credit derivatives course; among others. We describe
below our suggested selection of chapters for each of these.
FIGURE 1
The Flow of the Book
1
Overview
2–4
Forwards/Futures
Pricing
5–6
7–14
Interest-Rate Forwards/
Options
Futures, Hedging
15 –16 17
Advanced Options Option Sensitivity
23 20 –22
18 –19
Interest Rate VaR, Convertibles,
Exotics
Swaps Real Options
24 –25 26–27
Equity, Currency, and Term Structure of
Commodity Swaps Interest Rates
28–30
Term-Structure
Models
35 –36
31– 34
Finite-Differencing
Credit Derivatives
and Monte Carlo
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xx Preface
A first course in derivatives typically covers forwards and futures, basic options material,
and perhaps interest rate swaps. Such a course could be built around Chapters 1–4 on futures
markets and forward and futures pricing; Chapters 7–14 on options payoffs and trading
strategies, no-arbitrage restrictions and put-call parity, and the binomial and Black-Scholes
models; Chapters 17–19 on option greeks and exotic options; and Chapter 23 on interest
rate swaps and other floating-rate products.
A second course, focused primarily on interest-rate and credit-risk modeling, could begin
with a review of basic option pricing (Chapters 11–14), move on to an examination of more
complex pricing models (Chapter 16), then cover interest-rate modeling (Chapters 26–30)
and finally credit derivatives and credit-risk modeling (Chapters 31–34).
A “topics” course following the first course could begin again with a review of basic op-
tion pricing (Chapters 11–14) followed by an examination of more complex pricing models
(Chapter 16). This could be followed by Value-at-Risk and risk-budgeting (Chapter 20);
convertible bonds (Chapter 21); real options (Chapter 22); and interest-rate, equity, and
currency swaps (Chapters 23–25), with the final part of the course covering either an intro-
duction to term-structure modeling (Chapters 26–28) or an introduction to credit derivatives
and structural models (Chapters 31 and 32).
Finally, a course on fixed-income derivatives can be structured around basic forward
pricing (Chapter 3); interest-rate futures and forwards (Chapter 6); basic option pricing and
the Black-Scholes model (Chapters 11 and 14); interest rate swaps, caps, floors, and swap-
tions, and the Black model (Chapter 23); and the yield curve and term-structure modeling
(Chapters 26–30).
A Final Comment
This book has been several years in the making and has undergone several revisions in that
time. Meanwhile, the derivatives market has itself been changing at an explosive pace. The
financial crisis that erupted in 2008 will almost surely result in altering major components
of the derivatives market, particularly in the case of over-the-counter derivatives. Thus, it is
possible that some of the products we have described could vanish from the market in a few
years, or the way these products are traded could fundamentally change. But the principles
governing the valuation and risk-management of these products are more permanent, and
it is those principles, rather than solely the details of the products themselves, that we have
tried to communicate in this book. We have enjoyed writing this book. We hope the reader
finds the final product as enjoyable.
Acknowledgments
We have benefited greatly from interactions with a number of our colleagues in academia
and others in the broader finance profession. It is a pleasure to be able to thank them in
print.
At New York University, where Raghu currently teaches and Sanjiv did his PhD (and
has been a frequent visitor since), we have enjoyed many illuminating conversations over
the years concerning derivatives research and teaching. For these, we thank Viral Acharya,
Ed Altman, Yakov Amihud, Menachem Brenner, Aswath Damodaran, Steve Figlewski,
Halina Frydman, Kose John, Tony Saunders, and Marti Subrahmanyam. We owe special
thanks to Viral Acharya, long-time collaborator of both authors, for his feedback on earlier
versions of this book; Ed Altman, from whom we—like the rest of the world—learned a
great deal about credit risk and credit markets, and who was always generous with his time
and support; Menachem Brenner, for many delightful exchanges concerning derivatives
usage and structured products; Steve Figlewski, with whom we were privileged to serve as
co-editors of the Journal of Derivatives, a wonderful learning experience; and, especially,
Marti Subrahmanyam, who was Sanjiv’s PhD advisor at NYU and with whom Raghu has
co-taught executive-MBA and PhD courses on derivatives and credit risk at NYU since
the mid-90s. Marti’s emphasis on an intuitive understanding of mathematical models has
considerably influenced both authors’ approach to the teaching of derivatives; its effect may
be seen throughout this book.
At Santa Clara University, George Chacko, Atulya Sarin, Hersh Shefrin, and Meir
Statman all provided much-appreciated advice, support, and encouragement. Valuable input
also came from others in the academic profession, including Marco Avellaneda, Pierluigi
Balduzzi, Jonathan Berk, Darrell Duffie, Anurag Gupta, Paul Hanouna, Nikunj Kapadia,
Dan Ostrov, N.R. Prabhala, and Raman Uppal. In the broader finance community, we have
benefited greatly from interactions with Santhosh Bandreddi, Jamil Baz, Richard Cantor,
Gifford Fong, Silverio Foresi, Gary Geng, Grace Koo, Apoorva Koticha, Murali Krishna,
Marco Naldi, Shankar Narayan, Raj Rajaratnam, Rahul Rathi, Jacob Sisk, Roger Stein,
and Ram Sundaram. The first author would particularly like to thank Ram Sundaram and
Murali Krishna for numerous stimulating and informative conversations concerning the
markets; the second author thanks Robert Merton for his insights on derivatives and guid-
ance in teaching continuous-time finance, and Gifford Fong for many years of generous
mentorship.
Over the years that this book was being written, many of our colleagues in the pro-
fession provided (anonymous) reviews that greatly helped shape the final product. A very
special thanks to those reviewers who took the time to review virtually every chapter in draft
form: Bala Arshanapalli (Indiana University–Northwest), Dr. R. Brian Balyeat (Texas A&M
University), James Bennett (University of Massachusetts–Boston), Jinliang (Jack) Li (North-
eastern University), Spencer Martin (Arizona State University), Patricia Matthews (Mount
Union College), Dennis Ozenbas (Montclair State University), Vivek Pandey (University
of Texas–Tyler), Peter Ritchken (Case-Western Reserve University), Tie Su (University
of Miami), Thomas Tallerico (Dowling College), Kudret Topyan (Manhattan College),
Alan Tucker (Pace University), Jorge Urrutia (Loyola University–Watertower), Matt Will
(University of Indianapolis), and Guofu Zhou (Washington University–St. Louis).
As we have noted in the preface, this book grew out of notes developed by the authors for
academic courses and professional training programs at a number of institutions including
xxi
xxii Acknowledgments
Harvard University, Santa Clara University, University of California at Berkeley, Citibank,

Credit-Suisse, Merrill Lynch, the IMF, and, most of all, New York University. Participants
in all of these courses (and at London Business School, where an earlier version of Raghu’s
NYU notes were used by Viral Acharya) have provided detailed feedback that led to several
revisions of the original material. We greatly appreciate the contribution they have made to
the final product. We are also grateful to Ravi Kumar of Capital Metrics and Risk Solutions
(P) Ltd. for his terrific assistance in creating the software that accompanies this book; and to
Priyanka Singh of the same organization for proofreading the manuscript and its exercises.
A special thanks to the team at McGraw (especially Lori Bradshaw, Chuck Synovec,
Jennifer Upton, and Mary Jane Lampe) for the splendid support we received. Thanks too to
Susan Norton for her meticulous copyediting job; Amy Hill for her careful proofreading;
and Mohammad Misbah for the patience and care with which he guided this book through
the typesetting process.
Our greatest debts are to the members of our respective families. We are both extraordi-
narily fortunate in having large and supportive extended family networks. To all of them:
thank you. We owe you more than we can ever repay.
Rangarajan K. Sundaram
New York, NY
Sanjiv Ranjan Das

Santa Clara, CA
Chapter
1
Introduction
The world derivatives market is an immense one. The Bank for International Settlements
(BIS) estimated that in June 2012, the total notional outstanding amount worldwide was a
staggering $639 trillion with a combined market value of over $25 trillion (Table 1.1)—
and this figure includes only over-the-counter (OTC) derivatives, those derivatives traded
directly between two parties. It does not count the trillions of dollars in derivatives that are
traded daily on the world’s many exchanges. By way of comparison, world GDP in 2011
was estimated at just under $70 trillion.
For much of the last two decades, growth has been furious. Total notional outstanding
in OTC derivatives markets worldwide increased almost tenfold in the decade from 1998
to 2008 (Table 1.2). Derivatives turnover on the world’s exchanges quadrupled between
2001 and 2007, reaching a volume of over $2.25 quadrillion in the last year of that span
(Table 1.3). Markets fell with the onset of the financial crisis, but by 2011–12, a substantial
portion of that decline had been reversed.
The growth has been truly widespread. There are now thriving derivatives exchanges not
only in the traditional developed economies of North America, Europe, and Japan, but also
in Brazil, China, India, Israel, Korea, Mexico, and Singapore, among many other countries.
A survey by the International Swaps and Derivatives Association (ISDA) in 2003 found
that 92% of the world’s 500 largest companies use derivatives to manage risk of various
forms, especially interest-rate risk (92%) and currency risk (85%), but, to a lesser extent,
also commodity risk (25%) and equity risk (12%). Firms in over 90% of the countries
represented in the sample used derivatives.
Matching—and fueling—the growth has been the pace of innovation in the market.
Traditional derivatives were written on commodity prices, but beginning with foreign cur-
rency and other financial derivatives in the 1970s, new forms of derivatives have been intro-
duced almost continuously. Today, derivatives contracts reference a wide range of underlying
instruments including equity prices, commodity prices, exchange rates, interest rates, bond
prices, index levels, and credit risk. Derivatives have also been introduced, with varying suc-
cess rates, on more exotic underlying variables such as market volatility, electricity prices,
temperature levels, broadband, newsprint, and natural catastrophes, among many others.
This is an impressive picture. Once a sideshow in world financial markets, derivatives
have today become key instruments of risk-management and price discovery. Yet derivatives
have also been the target of fierce criticism. In 2003, Warren Buffet, perhaps the world’s most
successful investor, labeled them “financial weapons of mass destruction.” Derivatives—
especially credit derivatives—have been widely blamed for enabling, or at least exacerbating,
the global financial markets crisis that began in late 2007. Victims of derivatives (mis-)use
over the decades include such prominent names as the centuries-old British merchant bank
Barings, the German industrial conglomerate Metallgesellschaft AG, the Japanese trading
1
2 Chapter 1 Introduction
TABLE 1.1 BIS Estimates of OTC Derivatives Markets Notional Outstanding and Market Values: 2008–12
(Figures in USD billions)
Notional Outstanding Gross Market Value

Jun. 2008 Jun. 2010 Jun. 2012 Jun. 2008 Jun. 2010 Jun. 2012
Total Contracts 672,558 582,685 638,928 20,340 24,697 25,392
FX Derivatives 62,983 53,153 66,645 2,262 2,544 2,217
Forwards and FX swaps 31,966 25,624 31,395 802 930 771
Currency swaps 16,307 16,360 24,156 1,071 1,201 1,184
Options 14,710 11,170 11,094 388 413 262
Interest-Rate Derivatives 458,304 451,831 494,018 9,263 17,533 19,113
Forward rate agreements 39,370 56,242 64,302 88 81 51
Interest rate swaps 356,772 347,508 379,401 8,056 15,951 17,214
Options 62,162 48,081 50,314 1,120 1,501 1,848
Equity Derivatives 10,177 6,260 6,313 1,146 706 645
Forwards and swaps 2,657 1,754 1,880 283 189 147
Options 7,521 4,506 4,434 863 518 497
Commodity Derivatives 13,229 2,852 2,993 2,213 458 390
Gold 649 417 523 72 45 62
Other commodities 12,580 2,434 2,470 2,141 413 328
Credit Derivatives 57,403 30,261 26,931 3,192 1,666 1,187
Single-name instruments 33,412 18,494 15,566 1,901 993 715
Multi-name instruments 23,991 11,767 11,364 1,291 673 472
Source: BIS website (http://www.bis.org).
powerhouse Sumitomo, the giant US insurance company, American International Group

(AIG), and Brazil’s Aracruz, then the world’s largest manufacturer of eucalyptus pulp.
What is a derivative? What are the different types of derivatives? What are the benefits
of derivatives that have fueled their growth? The risks that have led to disasters? How is
the value of a derivative determined? How are the risks in a derivative measured? How
can these risks be managed (or hedged)? These and other questions are the focus of this
book. We describe and analyze a wide range of derivative securities. By combining the
analytical descriptions with numerical examples, exercises, and case studies, we present an
introduction to the world of derivatives that is at once formal and rigorous yet accessible
and intuitive. The rest of this chapter elaborates and lays the foundation for the book.
What Are Derivatives?

A derivative security is a financial security whose payoff depends on (or derives from) other,
more fundamental, variables such as a stock price, an exchange rate, a commodity price,
an interest rate—or even the price of another derivative security. The underlying driving
variable is commonly referred to as simply the underlying.
The simplest kind of derivative—and historically the oldest form, dating back thousands
of years—is a forward contract. A forward contract is one in which two parties (commonly
referred to as the counterparties in the transaction) agree to the terms of a trade to be
consummated on a specified date in the future. For example, on December 3, a buyer and
seller may enter into a forward contract to trade in 100 oz of gold in three months (i.e., on
March 3) at a price of $1,500/oz. In this case, the seller is undertaking to sell 100 oz in
three months at a price of $1,500/oz while the buyer is undertaking to buy 100 oz of gold
in three months at $1,500/oz.
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of lightness, there is no touch of actual comedy. And when the
tortures so characteristic of the Italian temperament—a temperament
never more inventive than when spurred on by the motive of cruelty
—when these are tried upon the long-suffering Duchess—when
crazy folk yell in an adjoining chamber, and a hand that seems to her
dead and cold is proffered to her where she expected a live one—an
audience without imagination, without historical knowledge, versed
only in the commonplace and the cockney, titters, it may be, or
becomes indifferent.
Much of Mr. Poel’s best work went into the training of an
intelligent company. His rehearsing ensured a certain smoothness
and expressiveness of general movement. Mr. Bassett Roe bore
himself with dignity and ease as the Cardinal, through whose
influence—for such appears to be Mr. Poel’s reading of the situation
—the forces of the Church in its bad period, the terrors of the
Inquisition, are brought to bear upon the ill-fated Duchess. Mr.
Murray Carson, as Daniel de Bosola, filled a great part well. Miss
Mary Rorke, with a dignified presence, a rich voice completely at her
service, and an unusual sense of the simplicity of pathos, was, as
the Duchess, an interesting and satisfactory figure. And Miss Hall
Caine filled out to completeness, by her intelligence and sunny,
sympathetic style, the small part of Cariola. Some people thought the
‘Dance of Death,’ as Mr. Arthur Dillon—a learned, helpful student of
the time—had cleverly devised it, was too horrible: it had to me the
fascination at once of the beautiful and the macabre. Horrors there
were in the performance, and in the piece, of necessity; but the
Independent Theatre—sometimes too little in touch with the main-
stream of English life and thought—may well permit itself to give a
piece in which Literature is burdened with horrors. Has it not more
than once indulged its supporters with things in which horrors are
unburdened with Literature?
(Academy, 29th October 1892.)

REMBRANDT
It is a bold thing to say, but yet I think it is a true one,—and the
saying is welcome to surprise the academic and conventional—that
if the painted work of Rembrandt did not exist at all, and if his
drawings were unknown, the three hundred etchings that he wrought
during some forty years of labour would assert for him, amongst all
capable judges, a claim to that place, precisely, which he is now
admitted to occupy. It is not that in saying this I would underrate for a
moment the skill of the pure colourist, the dexterity of the juggler who
plays with subtle hue, the master of the material which is applied to
prepared canvas; but that if one asks oneself, ‘What are the
qualities, really, which in any Art lead us to assign to the practitioner
of it his particular and permanent station?’ one finds shortly that
one’s answer has to be the following, or something like it: ‘The
qualities are an alert freshness and comprehensiveness of spirit, an
individual vision of the world, and the knowledge how best to wield
the instrument by which that vision is expressed.’
In the case of a writer, language is the instrument, and Sterne’s
or Molière’s perception and sensitiveness are made evident in
words. In the case of a pictorial artist, paint may be the instrument,
or water-colour, or the humble but expressive pencil—or the
instrument may be that which was Rembrandt’s more than any
other’s: it may be the needle of the etcher.
I hope that, in my enumeration of the qualities of intellect and
craftsmanship that make for excellence in creative Literature and in
pictorial Design, I have cut the ground from under the feet of those
who advocate the work of craftsmen merely—those who consider
that in technique lies the end as well as the beginning of success.
Even to the most casual of the students of the Arts—to the most
superficial observer of the means whereby the several performers
may produce their effects, in story, drawing, print—it can scarcely be
necessary to say that a command of technique must be demanded
by the severe and accurate judge. But the genius of a man of the
first order—a Goethe, Coleridge, Balzac, Rembrandt, Turner—is, as
it seems to me, misunderstood altogether, if the flexibility and
freshness of spirit and the originality of vision are not remembered
and praised when we praise too the excellent command of technical
means. And in the case of Rembrandt, the character and charm of
whose three hundred etchings are the theme of my discourse, the
first thing to take account of is that we have to deal not only with a
conjurer of the brush and a magician of the needle, but with a deep
soul. An âme d’élite—that is the true phrase for it: a being not above
human faults, but above average human excellence; a reveller in
pageantry, who yet had a tender eye for the large lines of simple
landscape; an artist who, with masculine perception of the import of
material things, was alive, constantly and keenly, also to the
concerns of the spirit; a judge of character, who understood and who
dissected all that he portrayed; a man of feeling, who rendered to the
full the pathos of age, of suffering, and of Death—who somehow
rendered also, as in the wistful portrait of the Prince of Orange, the
incommunicable pathos of Youth.
Over all Rembrandt’s work, from the beginning to the end of it,
as much on canvas as in drawing, as much in drawing as in etching,
there reigns an absolute sincerity. It was himself that he expressed.
Warped by no prejudice, modified by no fashion, his art, during the
generation and a half in which he did his joyful labour—in the midst
of personal triumph, in the midst, too, of personal disaster—recorded
his own unaffected perception of the outward world and his own
profound vision of the souls and the experiences of men. To study
his work, therefore, is, if we have the wit, to have the opportunity to
glean from it that which it is open to us to glean always from the
greatest Classics—the richer harvest of a familiarity not alone with
technical achievement, but with the great, deep way of apprehending
Life and the world.
From youth to age, with art delightful and supreme, Rembrandt
expressed himself in Etching. One of his first prints—the subject
known to many by Wilson’s title of it, ‘Head of a Woman lightly
etched’—is the earliest of his known portraits of his mother; and that
shows already mastery of character and mastery of line, as the lady,
with the pardonable vanity of the handsome, the pardonable self-
appreciation of one who was scarcely less a woman of the world
because she was bourgeoise by station, smiles her sagacious,
kindly, genial smile, and lives with Whistler’s ‘Portrait of his Mother,’
with Holbein’s ‘Erasmus,’ with Latour’s pastels that glow sober yet
vivid on the walls of the Museum of Saint-Quentin. It is a sketch, and
consummate. His very last print—so it is generally accepted—is that
‘Woman with the Arrow’ which, unless the place be given to the print
often called ‘Négresse couchée,’ is the most tolerable of his nudities.
It is not faultless in draughtsmanship; or, if it is faultless in
draughtsmanship, then how deficient was the model in perfection of
form! But, in a fine impression—and in Etching, if the impression be
not fine, the work does not exist—how alive is the figure! The flesh,
how supple! The pose—the grace of the faulty. The light, how
glowing, and the shade, how velvety! You forgive—it may be rather
that you scarcely notice—the inexplicable mixture of realism with the
classic. The side of a bed, the young thing sitting on it: Degas might
have conceived the figure thus. But it is not pure realism, for she
holds an arrow—suggests some light allegory, as much, save for her
imperfections, as some nudity of Titian’s or Tintoret’s—just that touch
of the Classic, that one remove from the actual, Rembrandt’s tribute
to an art inspired by higher thought, by fancy more elegant, than any
that it was the privilege, generally, of the art of Amsterdam to show.
Between that early etching, the first of his mother’s portraits, and
this final one, his last record of the body, to which he has imparted a
slimmer charm than the charm that belonged unquestionably to
Hendrickje Stoffels, the young and sympathetic companion of his
later years—recorded, opulent and somewhat sensuous, in the great
Edinburgh picture,—the range of Rembrandt, in about three hundred
prints, is almost inconceivably great. Several of his plates, and these
not really the least attractive, are, like the rare sheet of studies, with
the portrait of Rembrandt himself (No. 82 in the catalogue of Mr.
Middleton-Wake), so to put it, thumb-nail sketches as he passed
upon his way and was struck and interested by this or that
countenance, this or that gesture. Many deal with Sacred Subjects,
and invariably with a directness, a homeliness, one might say
almost, that is his alone. It would have been impossible so to have
conceived the incidents of Bible Story if Rembrandt had not so
profoundly believed in them. The conventional and perfunctory are
altogether banished. And though, for reasons that the present place
would not perhaps be quite the fittest for dwelling on, the Sacred
Subjects of this great Dutch master do not attract or charm as the
portraits and the landscapes do, there is yet in them a world of
material for serious study: in them invention and imagination enrich a
treatment fortified already by closeness of observation. His mind is
stored; his spirit is devout. In the ‘Death of the Virgin’ he takes
advantage of tradition—gives us therefore not only St. Joseph
moved at his loss, St. Luke with hand on wrist as feeling the pulse of
the dying, but (as Mr. Middleton-Wake reminds us) a company of
Apostles, brought miraculously, legend says, from distant missions;
and, above, are angels and cherubim. A religious composition better
known to the public, is the ‘Christ healing the Sick,’ or, as it is called
often, ‘The Hundred-Guilder Print.’ It got that latter name because,
during that portion of his life in which Rembrandt was popular, the
then substantial sum of a hundred guilders was wont to be obtained
for it, when, out of Rembrandt’s studio, an impression of it was sold.
Its intense reality and homely pathos—the qualities in it which have
influenced, so greatly, later and now living etchers, like Legros and
William Strang—gave it immediate value. And since those days a
fine impression has always had its price, though it should be said
here that the difference in money value, established more
particularly in our own generation, between a fine impression of the
most rare ‘First State’ of this plate and the less rare but often as
desirable ‘Second,’ is a fantastic difference, dependent only upon
relative difficulty of acquisition. Thank goodness, even now a twenty-
pound note will buy sometimes a most desirable Rembrandt etching.
A couple of hundred guineas is required to buy a fine impression of
the Second State of the ‘Hundred Guilder’; and of a First State, could
it come into the market, there is every reason for knowing that two
thousand pounds would be about the ransom.
In various branches of his practice, Rembrandt’s fame is about
equally dependent on picture, drawing, and original print; but I take
leave to ask the reader to impress upon his mind that in one branch,
the branch of Landscape, that is not so at all. Lord Lansdowne’s
‘Mill,’ a famous landscape at Cassel, and a few other landscapes
scattered about collections private and public, could not, however
undeniable their art and however complete their charm, secure for
Rembrandt that exalted place amongst the makers of Landscape
which the drawings give, and which is given yet more by the
etchings. It may be asked, naturally enough, ‘Why were Rembrandt’s
painted landscapes so few—his mastery being so great?’ The
answer is, that like our own Gainsborough’s, a century later, they
were painted, most of them, for his own personal delight. The
painted landscape of Rembrandt could not have been warmly
appreciated by a generation that made difficult the life of Hobbema,
and that extended welcome less to Wynants and De Koninck than to
the Dutchmen who had become Italianised in theme and treatment.
How, then, about the drawings and the etchings? Well, the truth is,
with these it mattered little. The drawings were generally masterly
brief studies. In the case of the etchings even, hours, not weeks, for
the most part—a day and not a month—had been bestowed on the
performance. For Rembrandt, with at least some other sources of
income, it was enough to have had the delight of execution; and
then, here and there a friend—the Burgomaster Six perhaps, or
Uytenbogaert, the Receiver-General to the States of Holland—would
want an impression or so. There was the little sketch ‘Six’s Bridge’—
a decisive, plain-sailing, by no means particularly picturesque record
of the wooden way whose name is associated with Rembrandt’s
lifelong friend. There is the ‘Goldweigher’s Field’—his estate, rather:
the estate of Uytenbogaert, lying a few miles from Amsterdam; its
pavilion and ornamental water, the surrounding lands, the modest,
heathy uplands, the trees and towers, a bird’s-eye view, a very
panorama of slightly undulating plain that stretches to the Zuyder
Zee. Of Rembrandt’s etched landscapes—which are rare generally
—this is one of the rarer, one of the more important. Art like that
does not captivate at just the first glance at it; but, with knowledge,
comes a deep appreciation of the vision and the chronicle.
Two other landscapes I should wish to name as at least the
equals of this one, and both of them, it may be, are easier to receive,
easier for the little-trained eye to enjoy promptly. One is the ‘Large
Landscape with a Cottage and Dutch Hay-barn’; the other is the
‘Landscape with a Ruined Tower.’ The first is a record of sunshine;
the second, of the more dramatic weather that threatens storm. The
first is the more intricate. Little in keeping with the fashions of our
moment, in the art of landscape, is it to present within the limits of a
single composition a view so varied and so elaborately wrought. But
Rembrandt, even more than Turner, could achieve without any loss
of unity of impression the presentation or suggestion of every fact of
the scene; and the piece remains ‘modern,’ though a Classic. The
‘Landscape with a Ruined Tower’—broad, decisive, concentrated—
is, in a sense, an anticipation of the method of Constable: the
interest lying less in formal elegance of line or placid light than in the
strong realisation of the forces of Nature—a vivid broad illumination
and an ominous shadow, and the expression of these exalting
somehow the features of an everyday land, as emotion transfigures
a face. The ‘tower,’ the close observer may inform me—thinking of
the title—is not ‘ruined’; for here is its domed roof. Yes, but the
domed roof is in the First State only, and that is so rare that it is
doubtful if it had ever been examined by the cataloguer who
bestowed upon the etching the name by which it is still known.
Although the etched Landscape of Rembrandt, in its singular
union of simplicity and learning, in the close, uncustomary alliance of
Style with personal impression, stands well-nigh alone, and suffices
as the basis of a reputation as great as Titian’s, Claude’s, or
Poussin’s—and one which now, with only slight and temporary
declension, has endured for two hundred years—we have yet to give
consideration to his triumph in that branch of Art with which, in the
mind of the average educated person, he is more generally identified
—I mean Portraiture: which means to some the taking of superficial
likeness, and to some the revelation of character.
For this reason and that, every industrious and thoughtful, as
well as every careless, student of pictorial Art, has his own favourites
in Portraiture: there is our pride in Reynolds, our joy in
Gainsborough, our wonder at the magic of Velasquez, our steady
confidence in truth when Holbein is the draughtsman, our grave and
brooding satisfaction over the august portraiture of the Venetians.
But Rembrandt unites men’s suffrages—carries with him even those
who admire most warmly this painter’s unswerving veracity and that
one’s fluent grace. And as one thinks what was the human material
which furnished elements for the creations of Rembrandt—the old
men and the women and the youths of Amsterdam—one thinks all
the more, how exalted was the vision, and yet how firmly with his
feet on earth stood the man to whom it was vouchsafed! Over and
over again, the needle, as the brush, of Rembrandt, has been
occupied with a face which had no beauty—at all events no formal
beauty—that we should desire him. He has given it interest and
dignity—dignity without a touch of the artificial or pretentious; the
dignity of the individual soul in its best hours. He did this more or
less at all times, but he did it more markedly in his later time than in
his earlier; for, wonderful as was the completeness of Rembrandt’s
art within its self-set limits in even his earliest time, he had, in
common with most of the greatest of creative and critical intellects,
that gift of long development, of steady progression. Rembrandt was
no juvenile prodigy. As time passed, as experience gathered, as
misfortunes saddened—at all events in certain lonely hours—the
spirit of a man of whom upon the whole indeed it may be said, he
‘rose distinct
Above slave-sorrows, to his chariot linked,’
Rembrandt’s command of the instruments of his employment

became only more complete, if also his method was more summary.
More and more sonorous were the notes he uttered, and the vox
humana stop, which is absent in colder craftsmen, sounded with
increased frequency and more assured appeal.
Of course in Portraiture, though he succeeds always, he
succeeds best when his themes are the best. With the exception of
‘Clément de Jonghe,’ with the exception of ‘Lutma,’ with the
exception perhaps of ‘Jan Six’—etched by him many years before he
wrought the noble painted portrait which is owned still by a
descendant of its sitter (Mr. Six van Hillegom of Amsterdam)—
Rembrandt is most profoundly interesting, most penetrating, most
sympathetic, when it is this or that member of his own family who
serves as his model. Once or twice at least he portrayed the features
of his son; several times those of his mother, whom in the ‘Mère de
Rembrandt au voile noir’ he records in an hour of austere and
guarded meditation, as in the ‘Head of a Woman lightly etched’ he
records her in the relaxation of social ease. Many times, in drawing,
print, and picture, he portrayed his wife, Saskia—in moods that
seemed to vary with his own: now perched upon his knee, in the
Dresden canvas of almost aggressive buoyancy and self-
satisfaction; now demure and pretty, in a Berlin drawing; now radiant
and almost stately in the ‘Great Jewish Bride,’ so it is said—though I
find least witness of her here—now the healthy, blameless animal of
Mrs. Joseph’s golden canvas; now the sick, worn woman, with
vitality gone, eye dimmed, life surely ebbing, of the lovely and
pathetic little etching which Sir Seymour Haden was, I think, the first
to christen ‘The Dying Saskia.’
But oftener than he depicted any member of his family—and
oftener much than he thought fit to give expression to the cordial
youthful face and ample contours of Hendrickje Stoffels, the
agreeable consolation of his age—he had recourse to his own
countenance. In the great series of what the Germans call ‘self-
portraits’ we may trace the changes in his air from spirited youth to
burdened years. To-day he is comely, clean, and fit. To-morrow, after
a night of revelry, it may be—for from few human experiences did
Rembrandt, any more than Goethe, stand aside—he is haggard and
‘to pieces.’ Then he is proud in cap and feather; he buckles on his
sword. Or, aged a little, he paints himself in loose gown, palette in
hand, it may be, and mahl-stick at his side. Then, heavy and
stooping, baggy below the eyes, with mouth tender yet saddened,
trouble has come upon him from all the ends of the earth. He totters,
scarcely yet irresolute, but weighed down certainly by years and
sorrows; his wife long gone; his fame obscured; his means narrow;
and, save for the sustaining power of his art, and one hopes, at
least, for the consolation of one deep affection, anxiety in all his
hours. We will not leave him like this—though like this we find him in
Lord Iveagh’s immortal picture, and in one or two representations of
kindred character in Vienna and at St. Petersburg. We will leave him
happy in his drawing. It is an etching of scarcely surpassable
interest, existing in many ‘States’—a print to be avoided in the later,
which are flat and expressionless; to be cherished in all the earlier, of
which the first is rarest and most vigorous. See its slashing
directness. With blow to left and blow to right, so to say it, on the
copper, he hacks his way triumphantly and speedily to his goal. He is
the master of all methods. Here, as in so much besides, he has been
broad and rapid. In the ‘Burgomaster Six’—which has something of
the quality of a mezzotint—how tender and how slow! In the
‘Clément de Jonghe’—the printseller of Amsterdam—how large yet
subtle! He is the master of many an instrument. We can apply to him
the phrase, and the implied eulogy, of Robert Browning—he ‘blows
through brass,’ but he can ‘breathe through silver.’
(Pall Mall Magazine, December 1898.)

DUTCH SEVENTEENTH CENTURY
DRAWINGS
The drawings, the studies, of the Italian Schools, and of all Schools
besides, have these sources of interest, always admitted—they
reveal to us, as studies must, the personal thought of the master in
his theme, and they may often be identified as preparations for some
long recognised picture with whose history we are henceforth to be
the better acquainted. But some among the drawings of the Dutch
School, though coming late indeed in the procession of the world’s
Art, are still the earliest to possess for us that different and self-
contained interest which belongs to work done for its proper sake,
itself realising the intention with which it was begun, and so, in the
first form in which it comes down to us, at once final and complete.
The School of Holland—that northern School to which at last, in
the great Seventeenth Century, supremacy in Art had moved—was
perhaps the first to adequately feel the value of those immediate
impressions which the Italians and the early Flemish had recognised
chiefly to control, to alter, to enlarge. And in the many methods of
their Art, the masters of Holland sought to perpetuate for the
beholders of their work the impressions which to themselves who
recorded them had perhaps been as fleeting as vivid. Sketches in oil,
sketches in water-colour, sketches in chalk, in bistre, and with the
reed pen, and sketches with the etching needle—these all, in the
hands of the great Dutchmen, were not merely studies for
themselves, but possessions for their public, just as expressive and
interesting as work more prolonged and elaborate. Therefore the
amount of finish which each of such finished sketches received was
not the important matter: with the greatest artists the amount was
often but small: they knew that the important matter was the
sufficiency of finish—its capacity for conveying to one mind the
impression received by another.
And it is characteristic of Dutch Art, and especially of Dutch
Landscape Art, that it had no period of painful and tentative labour,
like that during which the art of earlier schools had had to struggle
slowly towards freedom of expression. Profiting no doubt by the
experience of the Past, and the recent Past especially of Bruges and
of Leyden, it gained almost at once the power of finish always
expressive, always economical, yet often very swift and summary.
The work of its earliest masters—Roghman say, and Van Goyen—
has neither pettiness of manipulation when it is most delicate, nor
uncertainty when it is most rapid. The signs of an art mature and
masculine—economy of means, decision of hand—are promptly
upon it. Roghman, it appears, made few pictures, but many
drawings. There are five-and-twenty in the Museum of Rotterdam
alone. His drawings must have been acceptable to the public of his
day, and they show that a public then existed capable of the
intelligent interpretation of the work of an artist who left much to be
interpreted. Van Goyen, if he did not make many drawings, painted
many pictures with at least as marked an economy of means as he
has used in the few drawings we know. His science of large design
and the expressive completeness of his gradations of tone, enabled
him—often in picture and drawing alike—to dispense with the easier
attraction of various colour, so that even a modern master of colour,
Théodore Rousseau, was wont to hold him up as a model to his own
pupils.
Van Goyen travelled, and Roghman travelled, but their art, like
that of Rembrandt—their younger and greater contemporary, who
remained at home—continued to be not an imported art, but an art of
the soil; and it was only at a later period that the experience of travel,
and the contact with an art very different from their own, were to
bring to the Dutchmen a new method with a false ideal. There was
first the true Dutch time, rich and fertile—a time in which Van Goyen
painted, with a seeming monotony always delicately varied, the long
river banks, the low-lying towns, and the great high skies of Holland;
in which Cuyp fixed interest on the common aspects of the afternoon
fields, steaming in moist sunshine; in which Adrian van Ostade
passed from the vulgarities of the alehouse to the skilfully rendered
charm of the cottage door and the bench in the sunlight; in which Jan
Steen perfected himself in as keen and comprehensive a knowledge
of the world of men as Art has ever displayed; and in which
Rembrandt contentedly imaged Dutch life and landscape, always
with nearly equal vigour, nearly equal artistic precision, though at
one time in a style that formed the style of Gerard Dow and at
another in one that was inherited by Philip de Koningh or by Nicholas
Maas.
There were various local centres for these various workers and
their works. Leyden itself was a centre—the birthplace of
Rembrandt, the birthplace of Van Goyen. The Hague became a
centre, and Van Goyen removed to it; Amsterdam a centre, and
Rembrandt was a leader there. But Haarlem was the favourite, and
probably because of the privileges that belonged to the Guild of St.
Luke—St. Luke, the painters’ patron saint—which was established in
that town. The Guild of St. Luke at Haarlem has left us valuable
records—not indeed the raciest, but certainly among the most
trustworthy we can hope to have access to—upon Dutch Art, which
has wanted always, and wants to-day, a trustworthy general
historian. Laurens Van der Winne (as the Dutch writer, M. van der
Willigen, tells us, in his Artistes d’Harlem), towards the end of the
seventeenth century, made a list of one hundred and seventy-four
men who in his time were all reputed as good painters, and whom he
had personally known. His son, in 1702, after the father’s death,
noted that of these only sixteen were then living; and the grandson,
possessing himself of manuscript books and account-books of the
period, was able to enlarge the list of early members of the Guild,
and to add to our knowledge of its laws. ‘No one without the pale of
the Society could sell or introduce his pictures. Many painters thus
found themselves obliged to join the brotherhood in order to enjoy its
advantages. Every year two sales were announced by the officer of
the Society; each member could bring to the sale whatever he
desired to sell.’ ‘Many painters were attracted to the town,’ for lesser
or longer periods; but, though many painters contributed to the Guild,
‘it appears,’ writes the Haarlem citizen, ‘that they did not all live
here.’ Notwithstanding the advantages of the Guild, the profession of
painting was not lucrative for the many. Even the busiest and most
prolific artists, like Wouvermans, were debtors sometimes to men
who befriended them. Others were so indigent that they must needs
be excused their payment of the yearly moneys to the brotherhood.
In 1661, Frans Hals, the greatest of the Haarlem masters, found
himself in this circumstance. Haarlem, since his death, has happily
delighted to honour him.
The art of Holland, like the national life, saw many vicissitudes
during that eventful Seventeenth Century; and the second half of the
century brought changes of taste and fashion, which cast for a while
into the shade even such supreme art as the art of Rembrandt.
Leaders of social opinion were not proof against the attractions of
the work of Both and Berghem, which sacrificed so much that it
might gain, as it did gain, the outland charm of southern colour and
southern light; and the friend of Rembrandt, Jan Six, as one of many,
showed himself in the later years of the century a convert to that
newer and brilliant but bastard art. By the time that Cuyp and
Wynants had died old and Adrian Van de Velde had died young—
when the seventeenth century was entering its fourth quarter—there
remained among the home-bred landscape painters hardly one to
hold his own against the newer fashion. Hobbema, it is true, worked
on, with great and patient fidelity, but he worked unregarded and
died poor.
And in other branches of Art, after this time, the school declined.
William Van de Velde and Backhuysen—the two great painters of the
sea and the fleet—had had a worthy precursor in Renier Zeeman,
but they had no worthy successors. The best painters of gentle life
and of the life of the tavern were falling away. In the comparatively
humble but yet delightful field of ‘still life,’ only, could the early years
of the Eighteenth Century surpass the achievements of fifty years
before. The admired painter of flowers, Jan Van Huysum—whose
drawings are seen in large numbers at the British Museum, and
whose work is known, perhaps, at its best and boldest in his
drawings—then arose. He was one of a whole family of flower and
fruit painters; and not the only one who gave some excuse for the
ecstasy of a French novelist who was also a connoisseur. Balzac
declared of him that his work would hardly be paid for if it were
covered with diamonds. But Michael, his kinsman, was perhaps
almost as worthy of that praise. To their work succeeded, far on in
the Eighteenth Century, the vulgar mimicry of Van Os, with the
colours of the chromo-lithograph. And as to Landscape Art—that,
free once more from Italian influence, was indeed natural and Dutch
again in its aim, with Van Stry especially; but in its practice it insisted
rather upon the importance of detail than upon the value of effect.
Jacob Cats carried to its last length the trivial elaboration which had
become the fashion of his day. The virtue had gone out of Dutch Art,
and Dutch Art faded imperceptibly into modern painting.
It was one of the characteristics of the great men of the
Renaissance, that they tried many arts and were masters of many. It
was one of the characteristics of the Seventeenth Century
Dutchmen, that they tried many branches of Art, and were masters
of all that they tried. Supreme in technicalities of painting and in
technicalities of etching, they were the first to use with any large
effect the medium of water-colour, and their use of that, in a manner
not tentative and occasional, like Dürer’s, but often familiar and
accomplished as our own (of our great last generation), is shown by
many drawings. Coloured sketches assigned to Rembrandt,
doubtless on good foundation, are in the collections of the British
Museum and of M. J. De Vos, a veteran collector at Amsterdam; and
on our Burlington Club walls—not to speak of the wonderful pen
drawings, so decisive at once and free—is a sketch of a city gate,
from the collection of Seymour Haden, a sketch in which line counts
for little, and the effect is sought and gained by tender gradations of
tinting in monochrome. Probably of the same period are the two
drawings in which Philip De Koningh, who in landscape came
nearest to Rembrandt, has used his orange-browns with subtle
variation, to portray his wonted effects of infinite distance.
Colour, or it may be a wash of sepia, used by Rembrandt and by
De Koningh chiefly to suggest distance or tone, is used by Berghem
more often to suggest the pleasantness and warmth of sunlight,
which were so precious to him, and were the charm of his art. His
artificial but agreeable landscape of ordered valley and well-
disposed mountain and happy peasant of the opera, is represented
notably by one of the many splendid drawings belonging to Malcolm
of Poltalloch—a delicately coloured design, airy and sunny almost as
De Koningh’s best paintings, and to be noticed, not only for the
extreme rarity of such work in water-colour at that time and by that
master, but also for its foretaste of the subtlety with which our own
great art of water-colour learned, so many generations afterwards, to
reach atmospheric effects.
But it was in the painting of interiors that the resources of the art
of water-colour were used most fully by the Dutchmen, and they
were used only most fully in the old age of Berghem, and after the
death of Rembrandt, when Adrian van Ostade, himself now old, had
come from Haarlem to Amsterdam, and they were used best by that
master of ignoble conception and often repulsive work. The special
virtues of Ostade—accomplished management of light and shade,
and faultless composition of mean subjects—an instinct, that is, for
the spacing out, the perfectly balanced filling, the never crowding, of
his given area of paper or canvas—have long ago been
acknowledged; and his sense of beauty in colour and beauty in
grouping, and beauty indeed sometimes in line, in inanimate things,
has gone far to atone for that vulgar indifference to charm of figure
and face, common indeed to many of the Dutchmen, but Ostade’s to
an exceptional degree. Drawings of Mr. Malcolm’s and Mr. Cook’s
show him, once for all, the consummate practitioner of a branch of
art, the precedence in which—the invention of which, almost—our
own country has liked to claim. Rich and mellow, tender and
luminous, beyond all that has thus far been acknowledged, was the
best work of Ostade in his old age, in the English art of water-colour.
Dusart followed him in elaboration of work, but not at all in felicitous
adaptation of the means to the end.
There are naturally certain masters rightly famed for their work in
oil painting, who are seen at a disadvantage in drawings, whether by
pen or chalk or washes of colour. It is not all who gave to their
smaller designs, with whatever purpose of immediate sale,
completion so brilliant and expressive as that which we see, for
instance, in a little red chalk drawing of Wouvermans—a group of
figures, horses and dogs—a sharply finished work, exquisite in its
possession of every quality for which the master may be praised.
Again, some men dependent on glow of colour or gradations of tone
beyond the art of limited material, or at least beyond their command
of it—Cuyp, for instance—might be judged hardly by drawings. The
pleasantness of Cuyp is not in his drawings.
And then there are the great masters of one generation, who
have not been great masters at all in another: their excellence, seen
late, escaped the appreciation of their contemporaries or of their
immediate successors. Fashions in art change, and Van der Heist,
exalted by Sir Joshua above Rembrandt, drops later to his proper
place. Each age, we may be sure, has something right in its
criticism: the great Sir Joshua himself, who thought that ‘Bruges
afforded but scanty entertainment to a painter,’—Bruges, with its
masterpieces of the sacred art of Memling—had the keenness to see
the style and the beauty under the orgies of Jan Steen. But to this
inevitable variation and inconstancy of taste is due, alas! much
permanent loss—things that were treasures once being now not to
be guarded, or things of no account until now, being treasures for to-
day. And the loss is felt most surely in the case of drawings—so
short a period of neglect being enough to destroy them. It may be
that certain artists unrepresented in collections, or represented
inadequately, drew very little. All did not multiply studies with the
fertility of William Van de Velde; but all must have drawn, and the
work of some is missing to us. The flying sheets of long unvalued
artists, on which Hobbema pencilled the forms of many trees, with a
patient precision which in modern art only Crome has equalled—on
which Wynants drew his narrow path, wandering over the sandhills
or by the side of the farm—on which Jan Steen caught the rare girl’s
prettiness and the last subtleties of vivacious gesture—on which De
Hooch or Metsu drew tenderly faces of grave quietude, absorbed in
daily and common occupation—these flying sheets, one fears, were
dust and refuse two hundred years ago.
(Introduction to Burlington Club Catalogue, April 1878.)

VELASQUEZ AT THE NEW
GALLERY
A collection of Spanish Art at the New Gallery contains such
representation as it has been possible to acquire of Murillo, Ribera,
and Zurbaran—and even of the artists of our own century: Goya,
Madrazo, Fortuny—but nothing that vies for a moment in
attractiveness and vitality with the work of Velasquez. Unfortunately,
it does not include two of the most important of those canvases of
Velasquez which have a resting-place in England—Mr. Bankes’s
priceless ‘document’ (for it is that and something besides), the first
study, we mean, at Kingston Lacy, for the great Madrid picture of
‘Las Meninas,’ and the yet more important, because the even more
exceptional and more perfected picture, the astonishing ‘Venus,’
whose home for many years has been at a small country house
upon the borders of two counties in the North. The sketch—the oil
sketch, for Velasquez never made preparatory drawings—the sketch
of ‘Las Meninas’ would have recalled appropriately the composition,
and conveyed something of the character of a mature masterpiece
whose actual presence can never be looked for here; and the
recumbent ‘Venus’ would have shown an almost austere artist
winning for once an easy triumph in the treatment of a luxurious
theme, more properly, or more habitually, Titian’s. But, as it is, the
representation of Velasquez, in Regent Street, affords ground for
study. We could wish, for our own part, that decorative, even
symmetrical, arrangement had been discarded, and that the master’s
works, as far as they are here, had been seen close together, with
no distracting juxtaposition of paintings of a secondary rank. To have
ranged the Velasquez canvases in order of date would have been at
least to have facilitated reference and to have assisted observation.
Nothing, perhaps, is earlier, among the canvases of Velasquez
now shown, than the large, somewhat straggling picture—with
perfect composition yet to learn—of a ‘Peasant Boy Feeding Fowls.’
It comes from Ireland, and is lent by Lady Gregory. It does not, in
every particular, want breadth of treatment: it is broader in treatment,
indeed, than some things which may presumably have been painted
not very long after it. The vigour of perception, the realistic outlook
upon life, the point of view, in fact, is hardly less characteristic than in
work avowedly mature; yet, to pass on from it to painting of the first
Madrid, rather than of the Seville, period, is to move into the
presence of a much greater accomplishment. Before taking another
step, however, it may be well to glance at one picture like it in
subject, and, it is scarcely too much to say, even richer in handling—
a picture not Velasquez’s at all, yet a link in the chain of his history,
for it is the work of his first master, whose harsh temper drove the
youth from his painting-room—Herrera el Viejo: it is a broad and
finely treated representation of a bird upon the wing—‘A Partridge.’
This is one among the many interesting loans of Sir Clare Ford,
whose opportunities of study have been exceptional, and whose
devotion to Velasquez himself is indeed hereditary.
The Duke of Wellington is the owner of what seems to be the
first picture by Velasquez of whose history there is authentic record.
We saw it at the Royal Academy, one winter, in bygone years. It is
called the ‘Water-Carrier,’ or ‘El Corno, Aquador de Sevilla,’ and it
represents, with a force and luminousness already extraordinary, a
man in tattered brown doublet, bearing in one hand the large earthen
jar, and, with the other, tendering a glass of water to a boy standing
beside a table. It is recorded in the inventory of Buen Retiro, all but
two hundred years ago. Since then its fortunes have been various.
The picture figured amongst the impedimenta of Joseph Bonaparte
in his flight from Madrid, but at the rout of Vittoria it was captured
from his carriage, and Ferdinand VII. afterwards gave it to the Great
Duke. Sir Charles Robinson contributes an illustration of the story of
Jael and Sisera, painted, possibly, about 1623—a composition in
which, it is said, there is to be discerned a portrait of the Conde
Duque Olivarez (who at that period summoned Velasquez to
Madrid), and a posthumous portrait of the Duke of Alva; and it is
suggested that there may be in this canvas an allegorical reference
to the assassination of William the Silent. Two figures are in armour.
At Madrid, we believe, there are three suits of armour of the Duke of
Alva’s—there are ten of Charles the Fifth’s. A typical group of the
earlier work of the master may be said almost to end with the
presentment of the veteran ‘Spanish Beggar,’ belonging to Sir
Francis Cook, and, as it would seem, somewhat unnecessarily
questioned by such an industrious authority as Justi, who considers
that it is the work of a Fleming. Not even the most audacious of
assailants has ventured to throw doubt upon the portrait of
‘Quevedo’—a head and shoulders, black and deep brown-grey—the
poet wearing conspicuously those thick and dark-rimmed glasses
which, by reason of too assiduous study, he is reported never for a
moment after middle life to have been able to dispense with.
With Mr. Huth’s portrait of Philip the Fourth, a full-length, life-size
figure, and with the portrait of Don Balthasar, the eldest son of a
monarch who would appear to have spent an appreciable portion of
his lifetime in the painting-room of Velasquez, the artist reaches the
hill-top—a summit, fortunately, from which, even to the end of his
days, he was not destined to descend. The ‘Don Balthasar’ is the
possession of the Duke of Westminster. It shows the child in a
costume enriched with gold and silver, mounted upon a prancing
pony, in the courtyard of the palace; and finely painted as the face is,
the picture, as a whole, illustrates the justice of Mr. R. M.
Stevenson’s contention that in the outdoor full-length portraits, in
which ensemble, and atmosphere, realised background even, a
sense of the presence of the actual world, must needs count for so
much, there is not to be looked for that searching and intimate
treatment of the visage which Velasquez reserved in the main for
works which were studies of the head alone.
And if the Duke of Westminster’s ‘Don Balthasar’ (not to speak of
the Queen’s well-known and splendid representation of the boy)
illustrates this—a subordination of the personal portrayal to the
general effect—so the very perfection of the study of individuality is
evidenced in one or two of the portraits of Philip’s second wife,
Mariana of Austria, and in that unsurpassable achievement, the

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