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Again, read and we will clarify things once you are done with the original piece (which, as before, I have tried hard to have included in the book, on account of very fond writing memories) Since we have already touched upon the true meaning of the volatility smile (dealt with here in slightly different terms than before), focus more on the narration of how Black-Scholes and its ideology helped cause the most devastating one-day loss in the history of Wall Street The inescapable purpose of this effort is to show how destructive the side effects of BSM (and, thus, nance theory as an ideology) can be The Day When Black-Scholes Made Black-Scholes The 1987 stock market crash highlighted the structural aws of the model but it also unveiled its usefulness Imagine that you turn on the TV to check the latest news Immediately, you notice something important is going on.

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weighted by the position held in each security where a(t) = t, b(t) = Nt, and c(t) = 1. Thus, taking the differentials on both sides of equation (1.43) will yield equation (1.42). DEFINITION. A dynamic trading strategy {( t, Nt), 0 t T} is said to be self nancing if no capital is added to or withdrawn from the portfolio t after the initial setup at time 0. That is, we are only reallocating the capital between our long position in the stock and the short position in the money market account (borrowing). If we buy more stock, we short more shares of the MMA to borrow the money to fund the stock purchase. If we sell some shares of the stock, then we use the proceeds to reduce our debt (buy back some shares in the MMA we sold short). The self- nancing condition is equivalent to the following:

The presenters are in a frantic mood, with many of them covered in sweat and white-faced The word panic is regularly ashed in bright red colors You begin to wonder if World War III has begun in earnest Then you notice the little box at the bottom right of the screen, where stock prices are normally quoted And now you nally understand what the fuss is all about No wonder those pundits seem scared, you say to yourself, while feeling the fear creep inside WWIII it may not be, but a drop in the Dow Jones of 3,000 points is surely a terrifying sight (continued).

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