Assignment:
Video: "NOVA: Trillion Dollar Bet" (aka: "BBC: The Midas Formula")
As mentioned in class, the story of options and the development of the Black-Scholes formula is intertwined with the story of international financial markets and investmentand global financial crisis.
Although B-S was originally developed for pricing stock options, the formula that wehave been using in class for currency options is virtually identical. Specifically, exceptfor the term that discounts by the foreign interest rate, and of course the fact thatthe underlying asset is a foreign currency rather than a share of stock, the formulas are
exactly the same.
In addition to the development of the B-S formula, the video brings together manyconcepts that we have seen in class this semester, including (in no particular order):
- Replicating portfolio and no-arbitrage pricing
- Market efficiency vs. forecasting
- Statistical methods for characterizing returns and measuring risk
- Risk transfer role of derivatives and hedging
- Derivatives trading and exchanges
- International capital flows and investment
- Currency crisis and contagion