Wikipedia:Reference desk/Archives/Mathematics/2015 November 20

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November 20

Calculus formula on back of jacket

I saw a guy on a train wearing a fairly plain black jacket but there was a mathematical formula embroided on the back.

${\delta V \over \delta t}+{1 \over 2}\sigma ^{2}S^{2}{\delta ^{2}V \over \delta S^{2}}+rS{\delta V \over \delta S}-rV=0$

Does anyone recognize what this is and why would someone have it on their jacket? I'm guessing it's some math "in joke". Vespine (talk) 03:36, 20 November 2015 (UTC)

It's the Black-Scholes equation. As for what the intended message of putting it on a jacket was, your guess is as good as mine.--Antendren (talk) 08:29, 20 November 2015 (UTC)

This was the equation that all the financial experts were using until it was realised recently that there was a flaw in the assumptions. Sorry I can't remember the subtle details. Dbfirs 23:10, 21 November 2015 (UTC)

That's as much of an answer as I was expecting, thank you!

Resolved

The standard Black-Scholes equation computes the theoretical price of a European call option, which is a simple type of financial derivative. The jacket formula you saw is the generalized form of the equation, which is a partial differential equation that estimates the theoretical price of any "derived" asset in terms of the change in its "strike" asset. It's not flawed per se, but it assumes the asset return is normally distributed, which is not always the case in practice. My guess is the person you saw is a quant. OldTimeNESter (talk) 21:31, 23 November 2015 (UTC)