This is Barnard professor Perry Mehrling on the origin of interest rate and credit derivatives in the mind of Fischer Black. I highly recommend Mehrling's biography of Black, which I discussed previously here:
Black was both an undergrad and grad student at Harvard in physics. He didn't really complete his PhD in physics, but sort of drifted into AI-related stuff(!) at MIT, under cover of math or applied math.From the book jacket:
The bio says the only course he ever had trouble with was Schwinger's course on advanced quantum. The biographer suggests Black did poorly due to lack of interest, but I find that hard to believe given the subject matter, the lecturer, and the times ;-)
Black's point of view was clearly that of a physicist or applied mathematician. He really was a fascinating guy, and the biographer, an academic economist, can appreciate a lot of Black's thinking -- it's not an entirely superficial book despite being non-technical.
After reading the book, I don't feel so bad about questioning some of the fundamental assumptions made by academic economists. Black was asking some of the very same questions during his career.
... Although the options formula made him famous, it was only one of Black's numerous contributions to finance, including portfolio insurance, commodity futures pricing, bond swaps and interest rate futures, and global asset allocation models that have become standard in the world of finance. Amazingly, he did it all despite having no formal training in finance or economics, and despite spending the bulk of his career in business settings. Certainly the most notable non-academic theoretician of modern finance, Fischer Black was one of a kind...For more on derivatives history, see Pricing the Future and The World is our Laboratory.