The Black-Scholes model of derivative pricing
- Event time: 11:30am
- Event date: 26th March 2014
- Speaker: Fred Farrell (Formerly School of Physics & Astronomy, University of Edinburgh)
- Location: Room 2511, James Clerk Maxwell Building (JCMB) James Clerk Maxwell Building Peter Guthrie Tait Road Edinburgh EH9 3FD GB
The Black-Scholes model is a model used in finance to work out the price that should be charged for various 'financial derivatives' such as options (the option to buy something at a specified date in the future at a maximum price agreed now). This theory, published by Black and Scholes in 1973, was a major factor in the recent explosion in the trade of complex derivatives, which was a major cause of the 2008 financial crisis. I'll try and give an outline of the theory, which uses techniques of stochastic calculus common in statistical physics (the price of an asset is treated as a random walk), and if there's time discuss its limitations, such as its underestimation of risk.
This is a roughly weekly series of didactical blackboard talks focussing on some theoretical aspect of Condensed Matter, Biological, and Statistical Physics..