AN EMPIRICAL ANALYSIS OF BLACK-SCHOLES OPTION PRICING MODEL FOR SELECT BANKING STOCKS

Option pricing is a crucial factor for hedging and speculative activates. Pricing plays a vital role for option writers. Black-Scholes option pricing model is a widely accepted for pricing options. An attempt is made in this paper to test empirically the relevance of Black-Scholes options pricing model in Indian Derivative market with specific reference to select banking stock options. Results of the paired sample T-test revealed that there is no significant difference between the expected option prices calculated thorough Black-Scholes Model and market price of options, in three out of four cases. It can be inferred that model is relevant for banking stocks. Introduction: Option pricing is a very important in the derivatives market. Proper pricing of options eliminates the arbitrage opportunity. Mainly hedgers and speculators are found the derivatives market. Quantum of speculation is more in case of stock market derivatives. Pricing is relevant for both speculators and hedgers. There are two important models for option pricing - Binomial Model and Black-Scholes Model. Black-Scholes model is widely accepted. The present study is an attempt to study the relevance of Black-Scholes model in Indian Derivative market with specific reference to select banking stock options.