The Development of Financial Mathematics

  The Development of Financial Mathematics Student Name University Affiliation Course Name Instructor’s Name Assignment Due Date The Development of Financial Mathematics Perhaps the first scholar to illustrate the practical use of mathematics in a financial setting was the Greek philosopher Thales (624-547 BC). Aristotle tells the story of how Thales would use the stars to determine whether the following year’s olive harvest would be great . He would then give deposits to for the use of all olive-presses in Chios and Miletus, which were cheap in the off-season. When harvest time came, the demand for olive presses soared, and he let them out at any rate he chose. This ‘trade’ was nothing else but a call option on olive presses. A call option is a contract that gives the holder the right to buy an asset for a fixed price called the ‘strike price,’ either at the expiry date of the option (European option) or at any time before (American option) . Arguably the first Financial Engineering text was written by the mathematician commonly referred to as Fibonacci but whose real name was Leonardo of Pisa (1170-1250). His book was called Liber Abaci (The Book of Calculations). It gave methods of calculating the present value of alternative cash flow streams, solving various interest rate problems, and giving expressions for investment returns. The book was also credited with introducing Hindu-Arabic numbers to Europe, and Fibonacci later became famous for his work in number theory. However, his influence in finance was tremendous since it facilitated the foundation of credit and banking in Europe by giving methods of performing present value calculations. The French mathematicians Blaise Pascal (1623-1662) and Pierre de Fermat (1607-1665) are credited with establishing the foundation of the theory of probability. The principles they established were a solution to a gambling problem posed by the nobleman Chevalier de Mere. In particular, Chevalier was interested in whether or not to wager even money on the occurrence of a ‘double six’ in 24 throws of two die. While he believed that such a strategy would be pr...