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

Authors
Disciplines
  • Computer Science
  • Economics

Abstract

South Sea Company subscription shares were compound call options on the firm’s own original shares. From the description of shares found in 6 Geo. 1, c.4, a theory of their pricing is developed. A method for computing subscription share values is also developed. Calculated theoretical values for subscription shares are compared to the shares’ historical values and a close correspondence between the two is demonstrated. The pricing of the subscriptions appears to have been quite rational and explainable using simple financial economic theory.

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