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They understood and calculated volatility, perhaps not so precisely as the Black-Scholes model that later garnered a Nobel Prize in economics, but good enough to get by and not misprice quotes on the puts and calls they made markets in.
FORBES: Apple! Apple! Apple! Buy, Hold Or Sell?
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The Chicago native earned a finance doctorate at the University of Chicago in the early 1970s, when he worked with advisors like Nobel Prize winner Merton Miller and Fischer Black and Myron Scholes, coauthors of the Black-Scholes options pricing model.
FORBES: Money & Investing
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The idea that significant arbitrage opportunities are unlikely to exist (and certainly do not persist) is precisely the mechanism behind the Black-Scholes option-pricing model that Mr. Derman admires as a financial model behaving pretty well.
WSJ: Book Review: Models Behaving Badly
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Fischer Black, co-originator of the options-pricing model for which Messrs Merton and Scholes were recognised, died a year too soon to join his collaborators on the podium.
ECONOMIST: Nobel prize in economics