According to the BBC’s Tim Harford it's not every day that
someone writes down an equation that ends up changing the world. But it does
happen sometimes, and the world doesn't always change for the better. It has
been argued that one formula known as Black-Scholes, along with its descendants,
helped to blow up the financial world.
Black-Scholes was first written down in the early 1970s but
its story starts earlier than that, in the Dojima Rice Exchange in 17th Century
Japan where futures contracts were written for rice traders. A simple futures
contract says that I will agree to buy rice from you in one year's time, at a
price that we agree right now. By the
20th Century the Chicago Board of Trade was providing a marketplace for traders
to deal not only in futures but in options contracts. An example of an option
is a contract where we agree that I can buy rice from you at any time over the
next year, at a price that we agree right now - but I don't have to if I don't
want to.
You can imagine why this kind of contract might be useful.
If I am running a big chain of hamburger restaurants, but I don't know how much
beef I'll need to buy next year, and I am nervous that the price of beef might
rise, well - all I need is to buy some options on beef. But then that leads to a very ticklish
problem. How much should I be paying for those beef options? What are they
worth? And that's where this world-changing equation, the Black-Scholes
formula, can help….
No comments:
Post a Comment