Nicholas Dunbar, Author: “Inventing Money”
Alpha Exchange
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The Black Scholes Method of Pricing Options
In the 60s, a lot of people were working on the assumption that if you priced an option on our stock, it was a bit like working out what the stock was going to do in the future. The Black Scholes work effectively backed into the price of the option by identifying this replicating portfolio That reproduced its price in all states of the world and then saying, if we think the law of one price governs markets, in terms of market efficiency, this has got to be theprice of the option. It's just about how quickly that pricing technology made its way into the market.
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