The Certainty of Risk in the Markets of Uncertainty

The history and interpretation of the model for princing options that Bronzin proposed delineates and explains the evolution of the concept and indicates how risk was perceived by the society of the day. Financial derivatives, which were developed specifically to address trading risks, are now of central importance to a society for which security has become an empty concept and risk has become inevitable. Any attempt to secure protection from risk has itself become a risky venture. We find ourselves faced with a condition of endemic risk in which our search for security ends, not in protecting ourselves from dangers, but rather in generating new ones. Formalised models for pricing options have been very successful over the last decades because they dress risk in terms of volatility, which offers the clinical illusion of neutralizing the unpredictability of a future overshadowed by unstable markets and destabilized by a heightened sensitivity to risk. The calculation of implied volatility convincingly suggests that risk is controllable, even if the future is inevitably unknowable — a much more cogent requirement today than in Bronzin’s day: This also explains why his formula for pricing options met with only moderate applause back then compared to the strikingly similar models used today. But experience and theoretical reflection show that the very attempt to establish a prophylactic system against risk only generates yet further risks, thus reinforcing the impossibility of controlling the future.