The Trillion Dollar Equation - Black-Scholes Model
Mathematics and Random Walks Transform Finance and Risk Management Derivatives, a multi-trillion dollar industry, originate from physics and mathematics, with the discovery of atoms, heat transfer, and blackjack strategies. The Medallion Investment Fund, founded by mathematics professor Jim Simons in 1988, demonstrates the power of mathematical models, delivering 66% annual returns for 30 years. In contrast, Sir Isaac Newton, a renowned physicist, lost a significant portion of his wealth investing in the South Sea Company due to his inability to predict market behavior, famously admitting, "I can calculate the motions of the heavenly bodies, but not the madness of people." Louis Bachelier, born in 1870, pioneered the use of mathematics to model financial markets. At the Paris Stock Exchange, Bachelier observed the trading of options, which date back to ancient Greece, and found that no one had developed a consistent method for pricing them. He applied his knowl...
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