Research
Pricing of Index Options using Blacks Model
Stock index futures sometimes suffer from ‘a negative cost-of-carry’ bias, as future prices of stock index frequently trade less than their theoretical value that include carrying costs. Since commencement of Nifty future trading in India, Nifty future always traded below the theoretical prices. This distortion of future prices also spills over to option pricing and increase difference between actual price of Nifty options and the prices calculated using the famous Black-Scholes formula. Fisher Black tried to address the negative cost of carry effect by using forward prices in the option pricing model instead of spot prices. Black’s model is found useful for valuing options on physical commodities where discounted value of future price was found to be a better substitute of spot prices as an input to value options. In this study the theoretical prices of Nifty options using both Black Formula and Black-Scholes Formula were compared with actual prices in the market. It was observed that for valuing Nifty Options, Black Formula had given better result compared to Black-Scholes.
An Option Pricing Model That Combines Neural Network Approach and Black Scholes Formula
The Black & Scholes formula for theoretical pricing of options exhibits certain systematic biases, as observed prices in the market differs from the formula. A number of studies attempted to reduce these biases by incorporating a correction mechanism in the input data. Amongst non-parametric approaches used to improve accuracy of the model, Artificial Neural Networks are found as a promising alternative. The study made an attempt to improve accuracy of option price estimation using Artificial Neural Networks where all input parameters are adjusted by suitable multipliers. The values of these multipliers were determined using known data that minimises errors in valuation. The study was carried out using Nifty call option prices quoted on National Stock Exchange for the period 01-Jul 2008 to 30-Jun-11 covering three years.
Revisiting WACC
The paper compares classic WACC valuation method with equity cash flow and capital cash flow methods. As WACC method always use market values of debt and equity to determine weights, the method can give erroneous results whenever there are mismatches in the market valuation of debt. The tax-shield benefits are related to the actual interest amount that is based on the book value and therefore, the WACC computation method need to account tax shield benefits using book values. The paper used an example to compare valuation of a project using various valuation methods and found that the net present value obtained using modified version of the WACC, that used book value of debt to account tax shield, was comparable to other methods.
