Derivatives pricing - how do you get to an equilibrium price?

I have been thinking a lot about Derivatives pricing... No, I am not weird there are a number of people who do this and they even handed out the Nobel Prize to Robert C. Merton and Myron S. Scholes for developing a new method to determine the value of derivatives in 1997. It is interesting to note that the theory was conceived in 1973 by Fischer Black and Myron Scholes.

A typical investor who trades in securities like stocks, bonds etc really does not do a lot of trading with Derivatives because of the inherant risk characteristics... one could loose a lot of money on bad bets in the derivatives market. Without sophisticated tools and a firm understanding of how these instruments work investors would be exposing themselves to a lot of risk. More to follow...