Applicability of Black-Scholes and Black's option pricing models in Indian derivatives market

Abstract

Options are the most used financial derivative products. Option pricing is very important in the options market. Black-Scholes (BS) model is one of the most preferred and used models nowadays. 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.