Black-Scholes: The maths formula linked to the financial crash
It's not every day that someone writes down an equation that
ends up changing the world. But it does happen sometimes, and
the world doesn't always change for the better. It has been
argued that one formula known as Black-Scholes, along with its
descendants, helped to blow up the financial world. Black-
Scholes was first written down in the early 1970s but its story
starts earlier than that, in the Dojima Rice Exchange in 17th
Century Japan where futures contracts were written for rice
traders. A simple futures contract says that I will agree to buy
rice from you in one year's time, at a price that we agree right
now. By the 20th Century the Chicago Board of Trade was
providing a marketplace for traders to deal not only in futures
but in options contracts. An example of an option is a contract
where we agree that I can buy rice from you at any time over the
next year, at a price that we agree right now - but I don't have
to if I don't want to. You