Robert C. Merton
Robert C. Merton is an American economist who won the 1997 Nobel Memorial Prize in Economic Sciences. Merton, along with Fisher Black and Myron Scholes, developed a method of determining the value of options, alluded to as the Black-Scholes model.
Merton additionally developed an intertemporal capital asset pricing model (CAPM) in light of William Sharpe's capital asset pricing model. CAPM is an approach to working out anticipated investment returns in light of the level of risk.
Early Life and Education
Merton was brought into the world in 1944 in New York City and experienced childhood in Westchester County, New York. He has a Bachelor of Science in Engineering Mathematics from Columbia University, a Master of Science from the California Institute of Technology, and a doctorate from Massachusetts Institute of Technology (MIT), where he concentrated under Paul Samuelson, thought about one of the most persuasive economists of the twentieth century.
Merton went on at MIT as a teacher, showing there for almost twenty years, then, at that point, educating at Harvard University for an additional 20 years. He has since returned to MIT, where he is Professor Emeritus.
Outstanding Accomplishments
The Black-Scholes Model
Robert C. Merton is best known for the Black-Scholes model, otherwise called the Black-Scholes-Merton model. The Black-Scholes model is a model of price variation of financial instruments like stocks. In quite possibly of the main idea in modern economic theory, Merton, along with his partners, developed the 1973 model.
Merton received the Nobel Prize in Economics in 1997 for his work on the Black-Scholes model. The model remaining parts predominant and compelling. It is widely utilized today by investment bankers and hedge funds as the basis for hedging strategies. The Black-Scholes model is viewed as one of the most outstanding approaches to determining the fair price of options.
The Black-Scholes model basically works for European options where American options utilize the Bjerksund-Stensland model.
The Black-Scholes model requires five info factors to complete the calculation. Inputs incorporate the option's strike price, the current stock price, the opportunity to expiration, the risk-free rate, and the volatility. Furthermore, the model expects stock prices follow a log-normal distribution since asset prices can't be negative.
The model further posits there are no transaction costs or taxes, the risk-free interest rate is steady for all maturities, short selling of securities with the utilization of proceeds is permitted, and there are no riskless arbitrage opportunities. Contemporary models frequently vary, notwithstanding, taking into account transaction costs and different variations.
Long-Term Capital Management
Long-Term Capital Management was a hedge fund established by John Meriwether, who was a bond trader at Salomon Brothers and rose to turn into its bad habit director. The fund's strategy was mostly driven by both Merton and Scholes, who were likewise directors of the fund, and was incredibly levered.
With the financial crisis in Asia spreading and the economic issues of Russia debasing its currency and not paying its debt in 1998, LTCM started to lose huge measures of money and was near the very edge of collapse.
To forestall a complete meltdown that would have huge implications across financial markets, 14 banks and brokerage firms invested $3.6 billion into the hedge fund to forestall its collapse. The Federal Reserve worked with the cycle yet invested no money.
LTCM was saved from collapse yet the owners needed to surrender the bulk of their ownership and in the end closed down the firm and returned the $3.6 billion.
The Bottom Line
Robert C. Merton developed the Black-Scholes model, which is quite possibly of the main financial apparatus utilized in investing. It is utilized by derivatives traders and investors, especially those utilizing options, to price a derivatives option accurately. The model significantly assists traders and investors hedge their securities with insignificant risk.
Features
- Robert C. Merton is an American economist who won the 1997 Nobel Prize in Economic Sciences.
- Along with Fisher Black and Myron Scholes, Merton developed the Black-Scholes model, for which they won the Nobel prize.
- Merton was likewise one of the directors of the scandalous hedge fund, Long-Term Capital Management, which nearly collapsed in 1998 yet was rescued by a consortium of banks.
- The Black-Scholes model is perhaps of the main mathematical apparatus utilized in investing, which helps fairly price options, permitting traders and investors to hedge positions with little risk.
FAQ
What Books Has Robert C. Merton Written?
A portion of the books that Robert C. Merton has written incorporate Finance, Financial Economics, Cases in Financial Engineering, and Fallacy of the Log Normal.
For what reason Did Merton Win the Nobel Prize?
Robert C. Merton won the Nobel Prize in Economic Sciences for his work on the Black-Scholes model, which is a widely utilized and powerful model in the world of financial investing, especially derivatives.
What Is Robert C. Merton's Net Worth?
Robert C. Merton has a net worth of roughly $12 million. He is an economist that won the Nobel Prize, as well as having worked for financial institutions, for example, Arbitrage Management Company and Long-Term Capital Management. He has likewise held different positions as a teacher at exceptionally acclaimed universities.
