Modeling Seminar
University of Arizona, April 20, 2000

Title: Pricing and Hedging "Risky" Financial Derivatives

Speaker: M. Z. Bazant, MIT

Abstract:

As recognized by a recent Nobel Prize in Economics, the
Black-Scholes-Merton formula for options pricing irreversibly
transformed Wall Street in 1973. Almost overnight, the intuitive art
of trading was replaced by the quantitative science of stochastic
processes. In the past decade or two, however, various assumptions
behind the model have been systematically violated, sometimes with
disastrous effects (e.g. the 1987 crash).  In this lecture, a more
general theory of pricing and hedging stock options and other
so-called "financial derivatives" is presented, which serves to
illustrate an emerging shift from the Black-Scholes-Merton way of
thinking to account for real financial risk.  This paradigm shift is
being driven by the recent flux of ideas (and also of people!) from
theoretical physics to finance.

For more information, see 
http://math.mit.edu/~bazant/teach/IAP00-finance.