“An Empirical Study On Pricing Of Options In Indian Derivative Market: With Specific Reference To Private Sector Banks

Abstract

Trading in derivative is one of the important opportunity of an effective security. Options are the most
used financial derivative products. Option pricing is very important in the options market. The
derivative tools are particularly developed for minimizing the impact of associated risk. Black-Scholes
(BS) model is one of the most preferred and used models nowadays. The Black and scholes option
pricing model a partial equation is the most significant theory In the area of financial engineering. In
this paper, an attempt is made to study the relevance of BS model and Black’s model in Indian derivative
market with specific reference to the banking stock options from the Nifty bank index. The results of the
paired sample t-test revealed that there is significant difference between the model prices and market
prices calculated through BS model, while there is no significant difference between the calculated
model prices and market prices of options under Black’s model. It is observed that the Black’s formula
produces better alternatives than the BS formula for pricing the banking stock call options. In most of
the cases, it is seen that both the models have underestimated bank stock call options premium.