Shengxi Hu

Finance 450
Extra Credit 2
The Midas Formula

In the movie, the Midas Formula, produced by BBC, the narrator described how mathematic

algebraic formula influence the capitalism worlds economy and finance. This model measures

the market force and human behaviors in financial market. Actually, it provides regularity for

investors to reduce loss and increase revenue protected from the risk in market. Options reduce

the risk that investor loss money when the price change. The B-S model measures the risk and

the premium of options.

At the beginning of the video, the narrator said that the B-S model can predict and analyze

the risk which allow investors to make money as much as they can with no charge of risk. Then

the video mention the financial product in Chicago exchange place. The traders predict the trend

of price in the next a few years. Leo Melamed is an experienced trader in the Chicago Mercantile

Exchange, he mentioned market efficiency that whether information makes the price change or

not.

From the 7th minute of the video, the narrators mentioned that the long-term hedge and

random theory before academic find a regularity for stock price trend. They thought that the

mathematical statistical model can predict stock price and minimum the risk as much as they can

through option. It is a wonderful way to get rid of risk.

Then the video discussed the problem and application of option. It is not an obligation but it

eliminates the risk of stock price. However, the mathematical model developed to decide the

pricing of option itself, which is premium of options.

 After that, the video interpreted the process of pricing option. The volatility is important to

predicting stock price. They balance the price to hedge and eliminate the uncertainty of the

movement in the stock. The dynamic hedging can balance any movement, and create equilibrium

to reduce risk.

Portfolio cannot only reduce risk, but also can eliminate risk through different combo of

portfolio management. It clears out the uncertainty and decide any option price. The dynamic

hedging help to create risk-free stock. If I know the price of the stock, I know the price of the

option.

However, the calculation takes too much time to catch on the fast-changing market, people

need to find out an instant calculation. Then the narrator introduced a continuous model which

makes risk eliminate continuously. The final equation solves problems. Before the publish of the

model, traders has program the model in calculators to make money by option.

It helps international market when eliminate risk. When people trade in Japan, Germany or

other countries, the model reduce more risk from currency exchange.

In conclusion, the B-S model helped investors get rid of risk from predicting trend of stock

price. Also, it creates new thought of option which reduces or even eliminates risk in domestic

and international trade.