Jan 6, 2009

Early derivative contracts

Aristotle wrote about Thales of Miletus, a man who lived around 600 BC and was perhaps one of the first people ever to speculate on commodity prices using options. During the winter, he surmised that the olive crop would be plentiful this year, and bid on the right to use the olive presses during the summer, after the harvest came in. Since it was the off-season, there were no other bidders and he secured the call option quite cheaply. When the crop arrived as he predicted, there was great demand to make olive oil, and he was able to sell the options to the farmers for a tidy profit. This paper discusses in more detail the fair price for an olive press option, applying the Black-Scholes pricing model.

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