Wall Street Quants Owe a Debt to Obscure French Student

The 21st century began with a major correction on Wall Street and a long period of volatility in global financial markets. The VIX, sometimes called the fear index, soared, and congressional hearings explored why major investment banks couldn’t better hedge market risk. Traders sought reprieve, and risk management became elevated from prudent practice to a tool for financial survival.

Risk is most efficiently managed through the purchase of options and other derivatives. Many investors know that the economists Fischer Black and Myron Scholes are considered the pioneers of derivatives pricing through their options-pricing theory. Their Black-Scholes formula and its variations remain the primary tools in the optimal pricing and determination of derivatives hedges.