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Exploring the financial ecosystem

Deciding who is to blame and who should pay for the financial crisis will be a hot topic at the G8 next week. Financial mathematics received a lot of bad press in the aftermath of the crunch and many believe that it was the popularity of mathematical models – often borrowed from physics — that put the financial system at risk. But now models borrowed from biology are helping us understand how this risk might be reduced.
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Electronic board with listings saying sell

A risky business: how to price derivatives

In the light of recent events, it may appear that attempting to model the behaviour of financial markets is an impossible task. However, there are mathematical models of financial processes that, when applied correctly, have proved remarkably effective. Angus Brown looks at one of these, a simple model for option pricing, and explains how it takes us on the road to the famous Black-Scholes equation of financial mathematics, which won its discoverers the 1997 Nobel Prize in Economics.

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