We'll be going through the Black Scholes model of options pricing this week, lecture notes are here. Check the course pack for explanatory readings, and chapter 15 of the textbook. Make sure you review the lecture notes from week 9 before lectures. Some  interesting links on Black Scholes are here (an explanatory spreadsheet) and here (a highly critical piece on the BS model). Update. Here's a post about Prof. Robert Merton, one of the developers of the theory we'll go through (ht, BOH). Here's a recording of the lecture.

Here's a video on the intuition behind the BS model.

2 Responses to “Financial Economics Lecture 17”

1. Brian O' Hanlon

   05/04/2010 at 6:09 pm

   Steven,

   Robert Merton has a quite good lecture at MIT media, where he talks about the considerable risks involved in vanilla mortgage loans, not to mind any more sophisticated kinds of derivatives. You may have seen it before. BOH.

   http://designcomment.blogspot.com/2010/01/robert-merton-on-risk.html

2. Brian O' Hanlon

   05/04/2010 at 8:37 pm

   I am curious Stephen and maybe it is something to think about. I was reading Simon Carswell's story in today's Irish Times, Government asked AIB and BoI to help save Anglo.

   Following the Government’s announcement of the system-wide deposits and funding guarantee early on September 30th, deposits flooded into the Irish banks.

   http://www.irishtimes.com/newspaper/finance/2010/0405/1224267704808.html

   Maybe I am not seeing this correctly, but doesn't the quote from Simon Carswell's piece in the Irish Times, bear some relationship to what Robert Merton talked about. The asset-value insurance contract, whereby if the price of the assets go down, then the value of the guarantee goes up. I mean, it wasn't too hard to bet in September 2008, that the price of Irish property assets was on the way down. Why wouldn't deposits flow into Irish banks after the guarantee, if you look at it from Merton's point of view.