The Math and the Magic of Financial Derivatives. Klaus Volpert, PhD Villanova University August 27, 2012. Derivatives are controversial:. “. . . Derivatives are Engines of the Economy. . . “ Fed Chairman Alan Greenspan 1998, (the exact quote is lost)
Klaus Volpert, PhD
Villanova UniversityAugust 27, 2012
Dr. Henry Kaufman, May 1992
Derivatives are the dynamite for financial crises and the fuse-wire for international transmission at the same time.
Alfred Steinherr, author of
Derivatives: The Wild Beast of Finance (1998)
Warren Buffett in his Annual Letter to Shareholders of Berkshire Hathaway, March 8, 2003.
V =value of derivativeS =price of the underlyingr =riskless interest ratσ=volatilityt =time
Different Derivative Contracts correspond to different boundary conditions on the PDE.
for the value of European Call and Put-options, Black and Scholes solved the PDE to get a closed formula: