Vol 6 , Issue 1 , January - June 2017 | Pages: 1-10 | Research Paper
Published Online: July 20, 2017
Author Details
( * ) denotes Corresponding author
An option is a contract giving the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a derivative. In the case of a stock option, its value is based on the underlying stock (equity) and if it is an index option, its value is based on the underlying index. An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Some people remain puzzled by options. The truth is that most people have been using options for some time, because optionality is built into everything from mortgages to auto insurance. Several pricing models like Black-Scholes Model, Binomial Option Pricing Model, Stochastic volatility models etc., have been developed over the years to calculate the price of the options. The main objective of this paper is to test the consistency of these models by calculating the prices of the options for 175 companies listed in the National Stock Exchange (NSE) using Black – Scholes model and Binomial Tree pricing model, and comparing it with the current market option price. The study also checks the option pricing models for no arbitrage conditions such as the put-call parity using statistical methods
Keywords
Options, Call options, Put options, Black-Scholes Model, Binomial Option Pricing Model, put-call parity.