But this glittering tale would end in tragedy.

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So, the studios, no matter how steep the losses when these movies bomb, must gamble to stay in the game. That way, you couldn't lose.

In theory options are a perfect way to get rid of risk, but there was a problem.

It could do the unthinkable - it took the risk out of playing the money-markets. To its inventors it brought the Nobel Prize for economics. To those who used it, it brought great wealth. But this glittering tale would end in tragedy. The Black Scholes formula was invented 25 years ago, by three young mathematicians. They had been trying to solve a problem that had plagued economists for centuries - how to counter the randomness of market forces and the irrationality of human behaviour that made the markets dangerously turbulent.

Whilst pondering this dilemma, they made a remarkable discovery. The search for a way to price option contracts began in earnest when the thesis of an unknown student named Louis Bachelier was unearthed in the s. Working at the beginning of this century, Bachelier had set out to do something no-one had ever done before - using a series of equations he created the first complete mathematical model of the markets.

He had realised that stock prices moved at random and that it was impossible to make exact predictions about them, but Bachelier said he had also found a solution - through the pricing of a financial contract called an option. The risk in the stock market is that if you buy a stock today the price can drop in the future and you could lose money but if you pay for an option contract this gives you the right to wait and buy the stock if it reaches some agreed price in the future, but there's no obligation.

If the stock fails to reach that price you can opt out and you would lose only the cost of the option. In theory options are a perfect way to get rid of risk, but there was a problem. He had realised that stock prices moved at random and that it was impossible to make exact predictions about them, but Bachelier said he had also found a solution - through the pricing of a financial contract called an option. Stock prices The risk in the stock market is that if you buy a stock today the price can drop in the future and you could lose money but if you pay for an option contract this gives you the right to wait and buy the stock if it reaches some agreed price in the future, but there's no obligation.

If the stock fails to reach that price you can opt out and you would lose only the cost of the option. In theory options are a perfect way to get rid of risk, but there was a problem. How much would someone pay for such absolute peace of mind? Bachelier believed that if someone could discover a formula that would allow option contracts to be widely used, they would be able to tame the markets completely, but he died before he could find it.

By the end of the 60s, academics were no nearer to pricing options than they'd ever been. But all this was about to change when Myron Scholes and his colleague Fischer Black set out to tackle the problem of options… At its simplest level, the Black Scholes formula could be used to hedge against losing any bet, by working out how to place another bet in the opposite direction.

That way, you couldn't lose. The formula had the almost magical ability to allow you to make a fortune with the minimum of risk. But there was one problem. In the time it took to make the calculation, the fast moving markets had moved on and the calculation would effectively be out-of-date.

However, unbeknown to them, the problem had already been solved by a financial genius called Bob Merton. Using an idea taken from rocket science, the value of an option could now be constantly recalculated and the risk eliminated continually.

**BBC Horizon A TV-programme on the so-called Midas formula and the bankruptcy of Long-Term Capital Management (LTCM) BBC News Magazine Black–Scholes: The maths formula linked to the financial crash (April 27, article).**

The history behind perhaps the greatest formula ever created in finance: the Black-Scholes-Merton options pricing model. Two of its creators were awarded /10(30). The Midas Formula BBC2 pm Thursday 2nd December This is the extraordinary story of a beautiful mathematical formula that changed the world, the financial markets, and indeed capitalism.

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**The success of the DVD has propelled the Midas-formula sequels to dazzlingly high earnings. A studio with a successful franchise now assumes it . This is the extraordinary story of a beautiful mathematical formula that changed the world, the financial markets, and indeed capitalism itself. It could do the unthinkable - it took the risk out of playing the money-markets.**

Here’s a short documentary to end the weekend; chronicling the discovery and use of the Black-Scholes model from its infancy to LTCM’s collapse, this BBC production sheds some light into the minds of the academics who pursued it, the traders who loathed and then praised them, and how it changed the way options are being traded ever since. This is the extraordinary story of a beautiful mathematical formula that changed the world, the financial markets, and indeed capitalism itself.

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