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Black and Scholes option pricing model and its applicability

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  1. Introduction to Black & Scholes option pricing model
  2. Background of the study
  3. Objective of the research
  4. Using Black and Scholes model
    1. Calculation of volatility
  5. Types of the research
  6. Assumption underlying Black and Scholes model
  7. Hypothesis testing
    1. Hypothesis testing for Infosys Technologies for the year 2000
  8. Data analysis
    1. Conclusion from analysis
  9. Conclusion
  10. Bibliography

The world financial market has undergone qualitative changes in the last three decades due to phenomenal growth of derivatives. With the world embracing the derivative trading on a large scale, the Indian market cannot remain aloof, especially after liberalization has set in motion. Derivative trading was introduced in phased manner over a period of time.

Among the derivatives, options and futures contracts have been the most dominating one. However, regarding the hedging of stock, option has been the most effective one. Pricing is the most important part regarding the effectiveness of the option contract. Among the various option-pricing model, Black and Scholes model is the most efficient and globally used pricing model.

As India has already introduced stock option contract and has gained momentum in Indian Financial Market, the study of Black and Scholes option pricing model in Indian context is very important and contextual as well. That's why Black & Scholes option pricing model is the topic of this dissertation.

Albeit no generalization can be made, but Black & Scholes option pricing model reasonably holds good in Indian context. Hence, investors can use Black and Scholes option pricing model to determine the fair pricing and risk aspect of given option which is instrumental to formulate effective option strategies for effecting hedging. But investors should not fully depend on this model only. This model should be taken as a transformation model rather than exact pricing model. Stock price, strike price, maturity period, risk free interest rate and volatility are the key variables in Black & Scholes option pricing model.

[...] The dissertation is the study to find out whether the Black & Scholes option-pricing model is applicable in Indian stock market along with its application for finding out the option price and Greeks symbol like Delta, Gamma, Vega, rho of some Indian companies so that investors will be able to find out the relationship of option price with respect to stock price, interest rate and premium which in turn help them to abstract a clear picture of the future for the given contract STATEMENT OF PROBLEM This dissertation is the analysis of the applicability of Black & Scholes option pricing model in India stock market along with its application to find out the option price of some widely traded Indian companies NEEDS AND IMPORTANCE OF THE STUDY India introduced stock option contract just two years back and has become one of the major part of derivatives for hedging the risk in Indian Financial market. [...]

[...] Similarly, the Black and Scholes formulae are useful to calculate option pricing whereas Kolmogorov ?Smirnov test is instrumental to test the normality. This chapter basically deals with the methodology that has been employed in this dissertation. It covers the type of research; sampling technique used in this dissertation, sample size chosen, sample description, data collection, types of hypothesis used and the tools used in the hypothesis. Each will be described separately under the following headings TYPE OF RESEARCH Research design is purely and simply the framework for a study that guides the collection and analysis of data. [...]

[...] This dissertation covers the test to examine the applicability of Black and Scholes model in Indian stock market, the practical use of Black and Scholes model to evaluate the option price and the sensitivity analysis to examine the effects of various parameters in the context of Black and Scholes model. The test has been performed using Kolmogorov Smirnov test at the level of significance. Similarly, assumption has been made that the dividend paid out by selected companies in this study has been neglected or has not been taken in to account in the analysis. [...]

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