"Mathematics does not drive financial markets. People do."

Telling the story of Long Term Capital Management and the mathematical formula underlying its investment strategy, this NOVA special traces the development of the formula which helped to create a multi-trillion dollar industry--and its 1997 meltdown, which threatened markets around the world. In a clear presentation geared for an audience of interested novices, non-mathematicians, and financial wizards alike, NOVA explains the search for a formula which could solve the problem of risk and return in the stock market and turn financial investment into a science.

Economist Paul Samuelson in the 1950s first discovered the turn of the century work of Bachelier, a French graduate student, who posited that the development of options could protect investments against stock fluctuations. In the 1960s, Myron Scholes, Fisher Black, and Robert Merton further investigated the subject of options in an effort to discover how one could take only the upside and not the downside of options and how one might calculate the correct price of an option at any moment in time by knowing the current price of the stock. By devising a system of "dynamic hedging," they believed that they could eliminate uncertainty of movements and neutralize risk by spreading risks across individuals, financial markets, and through time. Scholes and Merton won the Nobel Prize for this pioneering work in economics, Black having died the year before the award.

When traders actually began to use this formula in financial markets, Scholes and Merton joined John Meriwether of Salomon Brothers to set up Long Term Capital Management, a company which was wildly successful until mid-1997, when two unforeseen, but ultimately crucial, events occurred--property prices plummeted in Thailand, and Russia reneged on its debt payment. LTCM continued to hedge its global investments, even as markets continued to diverge. Since LTCM stood to lose an astronomical $1.25 trillion if it collapsed, the Federal Reserve stepped in to prevent a global economic catastrophe.

Extensive interviews with Myron Scholes, Robert Merton, traders on the Chicago Board of Trade, Alan Greenspan, and others make this story come alive, offering cautionary notes about the continued use of models when unprecedented events, not included in such models, can have such profound effects on the world economy. Fascinating and thought-provoking for even the neophyte investor, this production illuminates the dictum that "Mathematics does not drive financial markets. People do." Mary Whipple

Trillion Dollar Bet

This is really a great video. If you have a passion for finance, you do have to watch it. It's an excellent opportunity to see the smartest people in the world of derivatives both "practitioners" and academics from top Universities. It is very clear and easy to understand even for those who have just entered the world of derivative evaluation using Black, Scholes and Merton formula. The opinions of all the protagonists are really inspiring and will give you a real feeling of this world, where advanced math, economics and practice are all melted together.

The Trillion Dollar Bet worth a bundle

In 1998 the largest ever financial collapse, the failure of Long Term Capital Management, risked pulling the world economy down with it until the Federal Reserve Board intervened and saved the day. Trillion Dollar Bet is the story of that rescue and the Nobel Prize-winning economists whose theories of hedge funds and risk management made LTCM possible. The film traces the evolution of theories of tracking the stock market by following minute variations in prices over time and the purported ability of the stock trackers to predict movement in the markets. Such a theory, if accurate, would permit investors to profit from such fluctuations at practically no risk, an exciting possibility. And for LTCM in its first years in the 1990s, the theory seemed to yield astonishing results, until the collapse of the Russian ruble in the summer of 1998 threw a monkey wrench into the works and threated the stability of stock markets around the world. This is an exciting story for those with an interest in investing and a modicum of economics background. The target audience is certainly the well informed and interested general public and not specialists. Difficult concepts are explained with crystal clarity and common sense examples. Members of the failed firm and the Nobel laureates contribute their views on the short term success and long term failure. I found myself riveted by explanations offered and the possibilities of "money for nothing." This may be the best Nova episode I have ever seen, and for an audience interested in stock markets, economics, finance and investing the film will stimulate your mind, entertain you, and make you smile at the arrogance of those who thought they had it all figured out.