When the Royal Swedish Academy bestowed the 1997 Nobel prize upon Myron Scholes, a double GSB alumnus and former faculty member, it gave the school even more to celebrate in its centennial year. The selection also made it easy to pick a noteworthy keynote speaker for Management Conference 1998.

The GSB’s newest Nobel laureate helped attract a crowd of approximately 1,200 to the 46th Management Conference.

Scholes won the Nobel Prize for developing the Black-Scholes options pricing formula with Fischer Black, which they published in 1973, shortly after Scholes joined Black on the GSB faculty. The Nobel Prize confirms what has become clear: the formula and the option pricing technology it spawned has changed the financial world, Scholes told the luncheon crowd.

"Trading derivatives has exploded since the 1970s; over-the-counter and off-exchange trading has exploded since the 1980s. It’s hard to prove, but I do think that the success of the Chicago Board Options Exchange and other options exchanges around the world, and now off-exchange trading, can be attributed to options technology," said Scholes. Using the Black-Scholes model and other approaches that evolved subsequently gave traders "the edge to set tighter spreads, take larger positions," he said. "Option pricing technology was adopted simply because it lowered transaction costs.

In the last decade, "an entirely new science has grown up–financial engineering," he added. Financial engineering is a system of applying the principles of finance, economics, statistics, and other fields to client problems in a global setting. The result of the process is new financial products.

Better technology is one force driving the transformation of the financial industry. Another is the explosion in financial theory–the sheer brain power thrown at it, Scholes said. "Academic and applied research has also expanded and continues to be a growth industry. The scarce resource here is not financial capital but human capital. We are increasing our understanding of the role unbending and packaging derivatives can play in the management of risk."

Scholes pointed out that equity capital is an expensive way to finance firms; hedging, while not without its own drawbacks, offers lower disclosure and agency costs. "As of this date, the intellectual acumen to engineer financial solutions is highly concentrated in [banks and major financial institutions.]" As more firms know how to use these solutions, they will substitute hedging for equity. Costs will fall and give them a competitive advantage."

After lunch, the crowd moved to the Gleacher Center to tap into the collective brain power of 48 panelists and a thousand or so attendees participating in 14 sessions on hot business topics. To learn more about specific sessions, click on the topics listed below.

After the Deluge–Should We Still Invest in Asia?

Data Mining: Marketing Gets Personal

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