A Review and Evaluation of Bronzin’s Contribution from a Financial Economics Perspective

In this chapter,1 Bronzin’s Treatise (1908) is analyzed from the perspective of modern financial economics. In the first two sections, we shortly characterize the general approach and institutional background of Bronzin’s analysis (5.1 and 5.2). The key valuation elements, such as the notion of “coverage”, “equivalence”, “fair pricing” and other fundamental insights about the properties of option prices are discussed in Section 5.3; it’s amazing to see how closely these valuation principles are related to the major principles of modern finance. Sections 5.4 to 5.6 deal with the major part of Bronzin’s analysis, the impact of alternative probability distributions on option prices. Among them, the Normal law of error (Fehlegesetz) is of particular interest because it allows a direct comparison to the celebrated Black-Scholes model; this relationship is explicitly addressed in Section 5.5. In Section 5.7, “repeat contracts” are analyzed which were a special type of option contract issued as extensions of forward contracts. Finally, Section 5.8 tries to summarize Bronzin’s contribution and to put it in perspective of the history of option pricing in the 20th century.