Black and Scholes option pricing model and its applicability

Type :

Research papers

Pages :

45 pages

Format :

.doc

Published date :

05/20/2009

Category :

Economics & finance

Sub category :

Finance

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Summary :

Introduction to Black & Scholes option pricing model
Background of the study
Objective of the research
Using Black and Scholes model
1. Calculation of volatility
Types of the research
Assumption underlying Black and Scholes model
Hypothesis testing
1. Hypothesis testing for Infosys Technologies for the year 2000
Data analysis
1. Conclusion from analysis
Conclusion
Bibliography

Abstract

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.