Sunday, July 22, 2012

Ian Stewart on the bank crash

''The mathematical equation that caused the banks to crash...
It was the holy grail of investors. The Black-Scholes equation, brainchild of economists Fischer Black and Myron Scholes, provided a rational way to price a financial contract when it still had time to run.
The equation itself wasn't the real problem. It was useful, it was precise, and its limitations were clearly stated. It provided an industry-standard method to assess the likely value of a financial derivative.
The trouble was its potential for abuse. It allowed derivatives to become commodities that could be traded in their own right.
'' [source]

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