Hazards to Navigation

When I was a reference librarian, I would, pretty regularly, get a request for information about "The Black-Scholes Model" (Black-Scholes). Black-Scholes is a mathematical equation that uses the price of stock (and other known variables) to determine the value of an option to buy the stock. Building on work done by Robert Merton, Black and Scholes first laid out their theory in a 1973 paper titled "The Pricing of Options and Coporate Liabilites."

The utility of Black-Scholes turned out to be far broader than just pricing options. As John Lancaster pointed out in the the most erudite goof you'll ever read, Black-Scholes "enabled people to calculate the price of financial derivatives based on the value of the underlying asset."

That's right - when Black & Scholes adapted the heat equation to finance they enabled the creation of much more accurate financial derivatives. This was considered sufficiently important that Merton and Scholes won the Nobel Prize in economics in 1997.

I don't pretend to understand any of this - reading the 1973 article is like trying to understand philosopy by starting with Spinoza. I found a purported simple explanation in the Norton Bankruptcy Reporter - maybe it'll help you? (Ayer, GOOD NEWS FOR BLACK SCHOLES SUFFERERS, 1999 No. 1 Norton Bankr. L. Adviser 7)

If you need to price your options, there are online engines that will Black-Scholes your numbers. What'll they think of next? No - don't tell me.

And don't forget - we're moving.