This year, the Royal Swedish Academy of Sciences awarded the Nobel Prize in economics to Robert C. Merton of Harvard University and Myron S. Scholes of Stanford University for a pioneering formula for the valuation of stock options. The laureates developed their method in the early seventies in close collaboration with Fischer Black, who died in 1995. While sometimes the Academy's decision is greeted with harsh criticism, this time there seems to be nearly unanimous agreement on the winners' merits. Special emphasis is put on their work's practical use and its wide applicability. The praise must sound strange to those remembering recent losses and failures in derivatives trading. This raises the question of the rationale behind the Stockholm decision and the signals it is sending to the markets in a time of growing uncertainties and instabilities.
KeywordsCall Option Stock Option Implied Volatility Strike Price Underlying Asset
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- 1.Compare, for example, M. Goldstein, D. Folkerts-Landau, P. Garber, L. Rojas-Suárez und M. Spencer: International Capital Markets, Part I.: Exchange Rate Management and International Capital Flows, Washington, DC 1993.Google Scholar
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- 3.For the following, see the background information given by the Academy via the internet under: http://www.nobel.se/announcement-97/economy97.html.Google Scholar
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