Klaus Volpert
Prepared Talks:
- Math and Magic of Financial Derivatives (can be given from beginning to advanced level)
- Are Financial Derivatives the `Engine of the Economy`, as declared by Alan Greenspan, or `Weapons of Mass Destruction', as Warren Buffett views them?
Over the last 30 years, financial derivatives have overtaken stocks and bonds as the investment vehicle of choice for many large investors. Derivatives are often behind the spectacular profits of investment banks as well as the mind-boggling losses (e.g. at Citigroup) that we read about in the papers. While CEO’s and hedge fund managers profit handsomely when things are going well, the losses are mostly born by shareholders and small investors. Pension funds, even school districts and townships have suffered from disastrous deals in derivatives.
It is therefore no exaggeration to say that taxpayers and investors can no longer afford to not understand derivatives.
So what are derivatives? Simply put, they are contracts between two parties that stipulate some cash flow over a certain period of time. The size of that cash flow depends on what happens to some underlying asset, such as a stock prices, interest rates, currency exchange rates or commodity prices.
The uncertainty in the development of the underlying creates the key difficulty, which is to properly evaluate the price and the risk inherent in a derivative.
In this talk I will give an overview of the three main methods to price derivatives:
1. The analytic method by Black and Scholes, based on PDE’s
2. The discrete approach by Cox-Ross-Rubinstein, based on binomial trees.
3. Monte-Carlo Methods, which average information obtained from simulating a large number of random walks of the underlying.
I will also discuss the advantages and short-comings of each method.
Contact Information:
- Institution: Villanova University
- Phone Number: 610-519-4670
- e-Mail Address: klaus.volpert@villanova.edu
