INTERNATIONAL FINANCIAL MANAGEMENT Take Home Assignment and Extra Credit Video II: “NOVA: Trillion Dollar Bet” (aka: “BBC: The Midas Formula”) (A separate link to the video is posted on Isidore) As mentioned in class, the story of options and the development of the Black-Scholes formula is intertwined with the story of international financial markets and investment and global financial crisis. Although B-S was originally developed for pricing stock options, the formula that we have been using in class for currency options is virtually identical. Specifically, except for the Tr e – * term that discounts by the foreign interest rate, and of course the fact that the underlying asset is a foreign currency rather than a share of stock, the formulas are exactly the same.
INTERNATIONAL FINANCIAL MANAGEMENT Take Home Assignment and Extra Credit Video II: “NOVA: Trillion Dollar Bet” (aka: “BBC: The Midas Formula”) (A separate link to the video is posted on Isidore) As mentioned in class, the story of options and the development of the Black-Scholes formula is intertwined with the story of international financial markets and investment and global financial crisis. Although B-S was originally developed for pricing stock options, the formula that we have been using in class for currency options is virtually identical. Specifically, except for the Tr e – * term that discounts by the foreign interest rate, and of course the fact that the underlying asset is a foreign currency rather than a share of stock, the formulas are exactly the same. In addition to the development of the B-S formula, the video brings together many concepts that we have seen in class this semester, including (in no particular order): – Replicating portfolio and no-arbitrag