George G. Szpiro, a mathematician, financial economist and journalist, has recently written a book called Pricing the Future. Options have been traded for hundreds of years, but for centuries nobody knew how to calculate their true value. Throughout history, mathematical and financial wizards tirelessly searched for the equation that would precisely establish their value and pricing. The problem was finally solved in 1973, and two of the discoverers Myron Scholes and Robert Merton received the Nobel Prize in 1997.
With narrative verve Mr. Szpiro describes the hunt for the elusive equation and the colourful personalities who conducted the spectacular search. He begins with the futures and options markets of the tulip bulb of the 1630s. Then, he writes about the Napoleonic ban on futures contracts and short sales.
Mr. Szpiro also includes forgotten characters, such as Jules Regnault, a self-taught broker’s assistant who wrote a book on the change of share prices over time and made a fortune trading shares. Another not so famous but great mind was Wolfgang Dölin, who obtained a PhD in mathematics at the Sorbonne and became a pioneering mathematician and innovator in the field of probability. He fought in the Second World War and, before shooting himself not to be captured by the German army, managed to post the sketch of a formula to the Académie des Sciences in Paris.
The envelope was opened only in May 2000, when it was found to contain the mathematical tools to describe the random movements of particles. These calculations modified the understanding of physics and paved the way to the building of the so-called Black-Scholes equation, which led to a flowering of options markets and an explosion of trading on them.