AN EMPIRICAL INVESTIGATION OF THE BLACK SCHOLES MODEL IN PRICING THE STOCK CALL-OPTIONS OF BANKING SECTOR STOCKS IN INDIA

Abstract

In India, the NSE commenced trading in derivative with the launch of index futures on June 12, 2000. Options are famous for their ability to cap the down side risk and keep the upside potential unlimited. In India we have only European options. Futures & Options segment of NSE has made a mark for itself globally. Although average daily turnover in F&O segment of exchange has increased from 410 cr. in 2001-02 to 123225.77 cr. in 2012-13 it is yet not fully traded.

Case study about option pricing will enlighten the academicians and investors about the practicability of the Black Scholes model and the relationship between theoretical and actual option price. Also they may understand the factors that affect the option price and the sensitivity of these factors. The data used for analysis refer to European type call options covering a period of 2 years of Indian banking sector, which include 5 private and 5 public banks. Our approach will be structured in two parts. The first will be dedicated to an estimate of daily implicit volatilities and comparison of model’s prediction with historical data to determine whether the predictions are accurate. Second, the assumptions made in developing the model have to be assessed to determine if they are consistent with observed behaviour or historical data.