PERMANENT EDUCATION #2 – STAVANGER - 2015
Jan Ubøe (Mathematics and Statistics Professor, Norwegian School Of Economics) gave a 30-minute lecture on the streets of Stavanger on the subject of option pricing. The equations – written in chalk on a public wall acting as a surrogate blackboard – were intended as a form of ‘knowledge propaganda’. Professor Ubøe explained to the public how banks can eliminate risk when they issue options and how banks (by trading continuously in the market) can meet their obligations no matter what happens. The option price is the minimum amount of money that a bank needs to carry out such a strategy. While the core argument is perfectly sound, it has an interesting flaw. If the market suddenly makes a jump, i.e. reacts so fast that the bank does not have sufficient time to reposition their assets, the bank will be exposed to risk. This flaw goes a long way to explain the devastating financial crisis.