Trading options before Black‐Scholes: a study of the market in late seventeenth‐century London¹

Abstract

SUMMARYThis article uses data from the ledgers of the financial broker Charles Blunt to explore the market in equity options that emerged in London during the stock market boom of the early 1690s. Blunt's ledgers provide a unique opportunity to observe the workings of an early modern derivatives market. They reveal a broadly based and highly active trade in options.The market functioned well, determined value using agreed criteria, and was utilised by a diverse range of individuals to facilitate both risk-seeking and risk-averse investment strategies.

Review of periodical literature published in 2009

“…However, on the same day that the order for paper money passed, the government also abated commodity payments to troops by a third; thus, those who refused to take their pay in the new bills faced a financial penalty. Meanwhile, Murphy finds the market for derivatives in 1690s London to be rational, orderly, effective, and impressively sophisticated. She analyses the ledger book of the stockbroker Charles Blunt, a third of whose approximately 1,500 recorded transactions (1692–5) were of derivatives.…”

Understanding financial derivatives during the South Sea Bubble: the case of the South Sea subscription shares

“…There is good evidence that informed opinion on options did exist and was acted upon, although the historical record is almost empty of overt expressions of such informed opinion. Murphy (2006) discusses these matters in a close study of the existing records of a London financial broker of the 1690s, Charles Blunt. Blunt and some of his clients, clearly understood the three elementary facts about option values listed above.…”

“…It is highly likely that, in the more . 15 There are examples in Blunt's ledgers of put and call options that share the same (at-the-money) exercise price (Murphy, 2006 , Fig. 2).…”

The Valuation of Equity Futures on the Tokyo Stock Exchange: 1920–1923

“…Certainly, this seems to be the case for option pricing: Moore and Juh (2006) document that options prices in early 20th century Johannesburg are remarkably similar to the Black-Scholes-Merton formula, even though the formula was not developed until the 1970s (Black & Scholes, 1973;Merton, 1973). Murphy (2009) finds this relationship even earlier in London in the 17th century.…”