Market Insider

What is Game Theory? Game Theory is the quantification and examination of how individuals, entities, governments, and firms make decisions in a competitive system, mainly through the mathematical model of Nash Equilibrium. In this competitive system, individuals, called players, compete for business, opportunities, resources, and profits, and their actions affect the actions and outcomes of other players. This model helps identify the optimal rational decision for all players through cooperation or conflict. Also known as the “science of strategy,” game theory considers choices, payoffs, and incentives to analyze how players behave in competitive environments. The cool thing is that game theory can be applied to various sectors in addition to economics, such as computer science and politics, really shaping how entities react and shape decisions off each other. The Nash Equilibrium- How Game Theory works? With Game Theory, many complex mathematical calculations are involved. However, we...

Intro The Black-Scholes Equation is one of the most valuable and impactful advanced financial models in Wall Street history. In this article, I will discuss what it is, how markets and institutions use it, and why it is essential. What is it? The Black-Scholes financial model/equation, denoted through the equation above, is a mathematical formula used to calculate the fair price of options for equities, where an option is a contract that lets you buy or sell a stock at a set price in the future). In a financial system where volatility is widespread and inevitable in all sectors, based on a geometric Brownian motion (signifies natural volatility in markets), the Black-Scholes model hedges option with underlying assets, leading to a risk-neutral valuation (removes risk) for options. Fischer Black and Myron Scholes included four different groups of terms, Volatility (randomness of price), Delta & Gamma (sensitivity to price changes), Theta term (time decay), and Risk-free (discounting...