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HISTORICAL AND MODERN ASPECTS OF TRADING IN FINANCIAL DERIVATIVES
Abstract
In 1960's professor Thorp found a way how to make extraordinary profits by investing in warrants. These investment instrument were generally unknown by then. Nowadays warrants are traded at significant volumes on the majority of stock exchanges all over the world. The pricing of warrants is usually based on the Black-Scholes formula designed for european call options which was presented in 1973 by Black, Scholes and Merton. Before the Black-Scholes formula was presented to the world, Thorp devoted several years to test his system, which has proved to be consistently profitable in both bull markets and bear markets with the average year profit of 25%. In this paper we examine if and how the Thorp's method could work on currently issued warrants and we analyze the differences in current trading system with the situation at the time Thorp began to compose his theory. We focus on the relationship between a warrant and its underlying asset, usually a common stock. In this paper we present only the basic findings.
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