I. Physics, Mathematics and finance: Bachelier and the Brown-movements » More!
II. Game: How much does the” FAIN IT!” token worth? » More!
III. Options » More!
IV. Options positions » More!
V. Price fluctuation on the financial markets » More!
VI. Buying volatility, sending volatility » More!
VII. Covering the options undertaking » More!
VIII. The pricing of options » More!
IX. Some edification » More!
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I. The physics, the mathematics and the finance: Bachelier and the Brown-movements
In 1828 Robert Brown published a dissertation, about the following experience: while examining pollen floating in a drop water, he discovered that the tiny pollen parts made never-ending, randomized movements. At first sight he throught that the parts were microbes but soon he proved to himself that it was something else. In the 1860's the atomists came to a resolution, that the Brown-movements- as the phenomena were called so far- are caused by the water molecules, that pushed the pollen randomly from every side. The pace of the movements grew as the temperature was raised.
What did Bachelier do? 120 years after Adam Smith and 180 years after Isaac Newton had given up trying to understand the “insanity of the people” and he became unknown. Bachelier saw the stock exchange rate as something that is pushed up and down, but not by the molecules, though. It was pushed by the invisible mood of thousands of investors and brokers. Bachelier stated that the drama occurring in the securities market is similar to science based on the tossing of coins.
First let's clarify some notions before.
The yield is the change of the invested value over a certain period. In general, people take the risk if they expect a great yield. The risk is that the yield is not fixed but changeable. To calculate the risk in statistics we use the standard of volatility. It shows how each capitalized income value diverges from the average yield.
1st illustration
In general, people prefer risk avoidance. It means that, if for example there was a game with the same chances of winning or losing 1 million forints the majority of people wouldn't risk entering the game. The reason for this is that to lose 1 million forints is more painful than the happiness of getting 1 million forint. This relation is shown by the 1st illustration in case of a starting capital of 11 million forints.
The option is a forward contract to buy or sell something without the obligation of accomplishing it.
