The history of option pricing and hedging

Abstract

This book is mainly about the mathematics of Professor Vinzenz Bronzin and his remarkable book on option pricing, published in 1908. This chapter concerns the wider history of option pricing and hedging where Bronzin's work shines out as a beautiful diamond. The study of the history of option pricing and hedging is much more than simply a study of the ancient past. It reveals more than this: It tells us where we came from, where we are, and possibly even gives us some hints about where we are going or, at least, what direction we should following. The put-call-parity, hedging options with options and some types of market-neutral delta hedging were understood and used at least a hundred years ago and is, in my view, still the foundation of what knowledgeable option traders use today. A careful study of the history, including several somewhat forgotten and ignored ancient sources, several of which have been recently rediscovered, tells us that many of the option traders as well as academics from history were much more sophisticated than most of us would have thought. Here, I will try to give a short (but still incomplete) and, hopefully, useful summary of the history of option pricing and hedging from my viewpoint today. The history of option pricing and hedging is far too complex and profound to be fully described within a few pages or even a book or two, but, hopefully, this contribution will encourage readers to search out more old books and papers and question the premises of modern text books that are often not revised with regard to the history option pricing. © 2009 Springer-Verlag Berlin Heidelberg.