Edward O. Thorp is an American mathematician who had a long and colorful career, to say at
Question:
Edward O. Thorp is an American mathematician who had a long and colorful career, to say at least. He is sometimes called the original quant, a quantitative analyst using his powers in the asset price analysis.
He started his career with publishing now-famous paper on probabilities in the game of Blackjack, where he predicted that as the cards leave the deck, the probability slowly turns against the house. This paper caused him to be recruited by Manny Kimmel, an infamous bookmaker from New York, who provided him with capital. As he went on a long streak of wins in Reno and Las Vegas casinos, he proved his theory was right. Soon enough, casinos had to change the game rules.
After this initial foray into gambling, Edward Thorp has turned to the derivatives markets. Using an innovative pricing strategy based on log-linear distribution, he was able to accurately calculate fundamental prices of options, derivatives for used by farmers and currency traders to hedge against future price movements. But this time, he did not publish his theory. He founded a hedge fund, Princeton/Newport Partners, and made unprecedented profits. These profits were so unusual that his organization was suspected of insider trading and investigated several times.
His theory, which he has never revealed, was eventually published by other researchers, Fischer Black, Myron Scholes and Robert C. Merton and became known as Black-Scholes-Merton model. Scholes and Merton have received a Nobel prize in economics for this discovery in 1997.
1. Write an essay critically evaluating how the log-normal distribution can be used in calculation of option prices, about the probability distributions and asset prices in general and about Edward O. Thorp and his colorful career.
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