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.

Option is a financial instrument which derives its value from the value of the underlying assets. An option is the right, but not the obligation, to the buyer either to sell or to buy the specified underlying assets for a stated price on or before a particular date. A call option gives the right to buy and put option gives the right to sell. Option is a unique and most preferred tool of risk management. Option strategies help the investors to limit the downside risk as well as to keep the upside potential unlimited. There has been a substantial development in the derivatives market in India since its inception. The derivatives turnover on National Stock Exchange (NSE) increased from 2,365 cr in the year 2000-01 to 64,825,834.30 cr in the year 2015-16. Also the equity derivative products have shown considerable growth. The index options have grown at a faster rate as compared to the other derivative products. Derivatives help to transfer risk from those who have them but may not like them to those who have an appetite for them. This has led to participation of more players which has resulted in higher trading volumes in the underlying market. Due to derivatives market, the speculative trades have shifted to a more controlled environment. It also helps to increase savings and investment in the long run.

The price of the option shall be logical and correct in order to make decision of buying or selling an option. The are many methods of option pricing like binomial method, Black-Scholes (BS) option pricing formula, volatility jump model, and Hull and White model, out of which the BS option pricing model is the most popular and widely used model for pricing options. BS option pricing model is used in all the leading option exchanges in the US, UK, Japan, India, etc.

Attempts have been made to customize the BS model due to the problem of deviation between the market price and calculated model price. Black used a forward price and developed the option pricing model. Many researchers have tested varied models to test the pricing efficiency and also to find option pricing model most suitable for Indian derivatives market. 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. This study is an applied research as it intends to find the relevance of the BS model and Black’s option pricing model in Indian derivative market. Finance and banking is very crucial and is termed as the life blood of trade, commerce and industry. Nowadays, the banking sector is considered as the backbone of modern business. Development of any country is very much dependent upon the banking system.

Financial Risk Management Journal,Financial Derivative Products,The Options Market, Black-Scholes (BS) model, The Banking Stock Options from the Nifty bank Index.