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Pricing the Future: Finance, Physics, and the 300-year Journey to the Black-Scholes Equation by George Szpiro

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EIGHTEEN
The Fat Tails
CAPITAL MARKETS AND THE MARKETS FOR DERIVATIVES form the foundations of a modern economy. By matching entrepreneurs who require money to operate and expand their businesses and investors willing to put their savings at the businesspeople’s disposal, capital markets allow an economy to develop and flourish. The so-called derivatives markets, where financial instruments, first and foremost options, are traded, bring together investors with different tastes for risk. Risk-averse investors use options to transfer some or all of their investment risk to trading partners who have the stomach to assume it. The combination of the two types of markets allows investors to build portfolios that reflect their preferred mixture of ...

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