Financial Guru

Fisher Black

Earlier Life Of Fischer Black

Born on jan 11, 1938 in in Georgetown,

Washington DC, USA
Graduated from Harvard college in 1959
Received PhD in Applied Mathematics
from Harvard University in 1964
Black joined the consultancyBolt,
Beranek and Newman
Black founded his own consulting firm
Associates in Finance in 1969

Black joined Arthur D Little where he

met Black Treynor
Began work at University of Chicago
(1971)
Black, along withMyron Scholes
published the paper 'The Pricing of
Options and Corporate Liabilities'
Joined MIT Sloan school of
Management
Joined Goldman Sachs

RESEACHER
MAIN
INTEREST
Economics
Social science that analyze
the production ,distribution
and consumption of goods
and services

Mathematical
Finance
is a field ofapplied
mathematics concerned
withfinancial markets.

Publication

Fischer Black, Myron Scholes, &

Micheal Jensen, "The Capital-Asset
Pricing Model: Some empirical tests",
in (1972).
F. Black & M. Scholes, "The Effects of
Dividend Yield and Dividend Policy on
Common Stock Prices and (1974).
F. Black, "Fact and Fantasy in the Use
of Options", (July/August 1975).
F. Black, "The Pricing of Commodity
Contracts", 1976

Publication

F. Black, "Noise", (1986).

F. Black, E. Derman, & W. Toy, "A OneFactor Model of Interest Rates and its
Application to Treasury Bond
Options",(1990).
F. Black & R. Litterman, "Global Portfolio
Optimization", (1992).
F. Black, "Interest Rates as
Options",Journal of Finance, vol. 50,
pp.13711376 (1995).

Books written by Fischer Black

Wrote this book in 1987

Active and Passive Monetary
Policy
Rational Economic Behavior and
the Balance of Payments
Ups and Downs in Human Capital
and Business

Wrote this book in 1995

volatility of consumption,
output, sales, investment
temporary layoffs, job changes
with and without intervening
unemployment,
the forces that cause migration
from poor to rich countries

The Black-Scholes Option Pricing Model

Fischer Black

Myron Scholes

Robert_C_Merton

First discovered in
1973 by Fischer
Black and Myron
Scholes in "The
Pricing of Options
and Corporate
Liabilities"
Then further
developed by Robert
Merton "Theory of
Rational Option
Pricing"

Also known as
theBlack-ScholesMerton Model

Option

Call(Right to buy)

Put(Right to sell)

An Underlying Asset
At a specific price (Strike Price/Exercise
Price)
Within or at a specific period of time

A call option is
in the money
at the money

if spot rate > strike price,

if spot rate = strike price,
out of the money if spot rate < strike price.

A put option is
in the money
at the money

if spot rate < strike price,

if spot rate = strike price,
out of the money if spot rate > strike price

Contingency Graphs for Currency Options

For Buyer of Call Option

For Seller of Call Option

Strike price = $1.50

Premium
= $ .02

Strike price = $1.50

Premium
= $ .02

Net Profit
per Unit

Net Profit
per Unit

+$.04

+$.04

+$.02

+$.02

0
$1.46

- $.02
- $.04

$1.50

$1.54
Future
Spot
Rate

Future
Spot
Rate
$1.46

- $.02
- $.04

$1.50

$1.54

Contingency Graphs for Currency Options

For Buyer of Put Option
Strike price = $1.50
Premium
= $ .03
Net Profit
per Unit

For Seller of Put Option

Strike price = $1.50
Premium
= $ .03
Net Profit
per Unit

+$.04

+$.04
Future
Spot
Rate

+$.02
0
$1.46

$1.50

+$.02
0

$1.54

$1.46

- $.02

- $.02

- $.04

- $.04

$1.50

$1.54
Future
Spot
Rate

The Model
C SN (d1 ) Ke RT N (d 2 )
where

ln
d1

Variable definitions:

S
2
T
R
K
2
T

and
d 2 d1 T

P Ke RT N (d 2 ) SN (d1 )

S
K
e
R
T

=
=
=
=
=

current stock price

option strike price
base of natural logarithms
riskless interest rate
time until option expiration
=standard deviation (sigma)

of returns on the underlying

security
ln= natural logarithm
N(d1) and N(d2) = cumulative
standard normal distribution
functions

Assumptions of the Black-Scholes

Model

The stock pays no dividends

during the options life
European exercise style
Markets are efficient
No transaction costs
Interest rates remain constant

Determinants of the Option Premium

Strike price
Time until expiration
Stock price
Volatility
Dividends
Risk-free interest rate

Problems Using the Black-Scholes Model

Does not work well with options that are

deep-in-the-money or substantially outof-the-money
Produces biased values for very low or
very high volatility stocks
Increases as the time until expiration increases

May yield unreasonable values when an

option has only a few days of life
remaining

Illness, death and Reward

In early 1994, Black was diagnosed

withthroat cancer and Black died in
August 1995.
In 1994 he received financial
engineer of the year
The Nobel Prize was not awarded to
Black in 1997 when his co-author
Myron Scholes because he died in
1995