Even though the CAPM was always on Fischer’s mind, his expertise in option pricing provided more opportunities. However, the Markets started using Fischer Black’s CAPM model more so than he anticipated. When derivatives came to market, Black was not too impressed, initially. According to Black, derivatives were not necessary. Not until after he realized derivatives could be used to hedge real risk, he embraced the new idea and saw how it could fit in with his ideal CAPM world.
B for John Doe - check your capitalization.
ReplyDeleteI like that this section emphasizes that a lot of inefficiency comes about because people like to trade and speculate. Five years before the big mortgage crash of 2008, Mehrling is noting that people take out fixed-rate mortgages with a call option that expose them to interest rate risk: see how that bit of speculation turned out?