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Bernard M -- Taipei English Tutor

Bernard M - English Conversation / TOEFL / IELTS 一對一英文會話

Sunday, September 28, 2008

Black–Scholes Equation


 \frac{\partial V}{\partial t} + \frac{1}{2}\sigma^2 S^2\frac{\partial^2 V}{\partial S^2} + rS\frac{\partial V}{\partial S} - rV = 0.
This is perhaps one of the more famous formulae in financial engineering. For the assumptions and mathematical parapharnalia that go along with it see
the Wikepedia article or The Formula That Shook The World. Myron Scholes and Robert C. Merton jointly won the 1997 Nobel Prize in economics for it. But don't be too impressed: They were on the board of Long-Term Capital Management (LTCM) which managed to lose $4.6 billion in less than four months (see the Wikepedia article).

I guess you can't blame the Black-Scholes equation itself, but unfortunately it has spawned many get rich quick schemes in financial engineering, which are partly to blame for the current financial crises.

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