Math’s Beautiful Monsters

“By the 1970s, Itō’s work had blossomed into a whole new area of mathematics, called stochastic calculus (mathematicians like calling things that are random “stochastic”). It came with a whole new set of tools and theorems, just as calculus had. Today, stochastic calculus is used to study all sorts of phenomena, from neurons firing in a brain to diseases spreading through a population. It is also at the heart of financial mathematics, where it helps banks estimate option prices. It can account for the bumpy behavior of a stock price, and hence reveal how the value of an option changes over time. The resulting equation, which is known as the Black-Scholes formula, is now used on trading floors around the world.”