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Effectiveness
of the Black-Scholes Model for Pricing Options in Indian Option
Market
-- Rinalini
Pathak Kakati
This
paper analyzes the Black-Scholes (BS) option valuation model
using options contracts on ten Indian Stocks. The option prices
provided by the BS models are compared to the market prices
of the options to gauge the pricing accuracy, money biasness,
maturity biasness, and call vs. put biasness of the BS option
pricing model. The study found that the BS model misprices
options considerably. In most cases, pricing error is negative
on an average, and is significantly different from zero, thereby
indicating underpricing in many cases. Underpricing reflects
the fact that the early exercise feature of the American options
is not being accounted for and appears to be overlooked by
the BS model. Mispricing worsens with both increased moneyness
and increased volatility of the underlying stocks. Further,
short-term options are often underpriced and long-term options
are mostly overpriced. If the BS model overprices (underprices)
low priced options, then it underprices (overprices) high
priced options on the same stock.
©
2006 IUP . All Rights Reserved.
Price
Discovery and Causality in the Indian Derivatives Market
-- D
G Praveen and A Sudhakar
The
study articulates the price discovery mechanism in India's
rapidly growing commodity futures market. The paper highlights
as to how the futures market influence the spot market and
facilitates better price discovery in the spot market. The
spot and/or futures market dominates the price discovery,
but it appears that a better price discovery occurs when there
is a mature futures market for the commodity. Granger Causality
Test is used for the study that focuses on the Indian stock
and commodity market. A comparison is drawn for price discovery
between the grown stock market and the growing commodity market.
Impact cost is considered for measuring the liquidity and
market efficiency, for Indian gold futures market.
©
2006 IUP . All Rights Reserved.
Price
Discovery and Causality in Spot and Futures Markets in India
-- Kapil
Gupta and Balwinder Singh
This
paper investigates the hypothesis that the recently established
Nifty Index Futures Market effectively serves the price discovery
function in the underlying spot market. Johansen's Cointegration,
Vector Error Correction Model and Generalized Impulse Response
Analysis are applied to test the hypothesis on daily data
from NSE. Bilateral causality is observed between Nifty Index
and Nifty Index Futures. The evidence supports the hypothesis
suggesting that the futures market in India is a useful price
discovery vehicle.
©2006 IUP . All Rights Reserved.
The
Amin/Bodurtha Framework for Interest Rate and Exchange Rate
Derivatives: Implementational Issues
-- Manfred
Frühwirth,
Paul Schneider and Markus S Schwaiger
The
Amin/Bodurtha (1995) framework, built on a discrete-time version
of the Heath/Jarrow/Morton (1992) term structure model and
the binomial model of Cox/Ross/Rubinstein (1979), allows a
consistent valuation of instruments driven by three sources
of uncertaintydomestic interest rate risk, foreign interest
rate risk and exchange rate risk. This makes the framework
applicable to a large number of different products such as
currency swap options, currency warrants, currency exchange
warrants or differential or cross-rate swaps, to name just
a few. After setting up the general framework, Amin/Bodurtha
provide two different specifications in order to reduce computing
complexity. As an alternative to these two specifications,
this paper deals with the most natural specification that
allows any combination of the up and down moves of the three
factors under consideration, without restraining volatility
functions or correlations of the three processes. After providing
closed-form solutions for the one-period drift terms in this
model specification, the authors implement the model by means
of the depth-first algorithm. A computing time analysis first
shows that use of the depth-first algorithm increases the
number of possible time steps as compared to traditional implementation.
In addition, the paper shows that replacement of correlated
random variables by linear combinations of mutually independent
random variables, as suggested by Amin/Bodurtha, saves the
computing time only for models with stochastic volatility
functions, and not with deterministic volatility functions.
©
2006 Manfred Frühwirth, Paul Schneider and Markus S Schwaiger.
All Rights Reserved.
Some
Aspects of Futures Trading in India: The Case of S&P Nifty
Futures
-- Ash
Narayan Sah
One
of the important functions of the futures market is to provide
hedging facilities to hedge price risk. This market also provides
scope to speculators due to low transaction cost and leverage.
This paper tests whether futures trading is going towards
hedging price risk or towards fulfilling the speculative desires
of sophisticated traders. The author uses daily data collected
from NSE for the period June 12, 2000 to March 25, 2004 for
a near month contract. He employes Ordinary Least Square (OLS)
for empirical analysis.The results establish that futures
trading is moving towards satisfying the speculative desires
of speculators rather than hedging price risk.
©
2006 IUP . All Rights Reserved.
Research
Summary
Facts
and Fantasies about Commodity Futures
In
the light of growing commodity futures around the world, it
is quite important for us to know about the properties, risk
and return with positive and negative correlation of the commodity
futures over a time period.
©
2004 Gary Gorton and K Geert Rouwenhorst. All Rights Reserved.
IUP holds the copyright for the summary.
Book
Review
Hot
Commodities: How Anyone Can Invest Profitably in the World's
Best Market
--
Jim Rogers
A
rising commodities market would shrink the profits of companies,
and therefore, reduce the prices of their stocks, theorizes
Jim Rogers. In the book, as a part of his conclusion, he states
that without commodities, no portfolio could be truly diversified.
In support, he cites the results of the research conducted
by Gary Gorton and K Geert Rouwenhorst for the Center of International
Finance at Yale School of Management.
©
2004 Beeland Interests, Inc. All Rights Reserved. IUP holds the copyright for the review. |
