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Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 1

PROJECT COMPLETION CERTIFICATE


This is to certify that project titled Comparitive Study of Binomial Option Pricing Model
and Black Scholes Option Pricing Model is successfully done by Ms. Supriya Pramod
Gunthey in partial fulfillment of her two years full time course Post Graduation Diploma in
Management recognized by AICTE through the Prin. L. N. Welingkar Institute of Management
Development & Research, Matunga, Mumbai.

This project in general is done under my guidance and I have validated the project conceptually
and theoretically but not on duplicity.





___________________________
(Signature of Faculty Guide)


Name: ______________________

Date: ______________________























Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 2

ACKNOWLEDGEMENTS


"Gratitude is not a thing of expression; it is more matter of feeling."

There is always a sense of gratitude which one express towards others for their help and
supervision in achieving the goals. This formal piece of acknowledgement is an attempt to
express the feeling of gratitude towards people who were helpful to me in successfully
completing this project.

First and foremost, I would like to thank our Group Director Prof. Dr. Uday Salunkhe for
giving the second year students the time and resources for completion of the final year
specialization project.

I would like to thank Prof. Kanu Doshi, Dean of Finance Department for his support and
guidance.

I would like to express my sincere gratitude to Prof. Dr. Suyash Bhatt, my mentor, for his help
and support. He was always there with his competent guidance and valuable suggestions
throughout the pursuance of this research project. I would also like to thank him for his
cooperation and for providing me with the helpful inputs which enabled me to complete the
project in a hassle free manner.
























Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 3

CONTENTS

Executive Summary 1
1. Introduction 2
2. Literature Review 7
3. Research Methodology 10
4. Data Analysis 15
5. Conclusion 49
6. References & Bibliography 50
7. Appendix 51


















Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 4

Executive Summary
Options are derivative contracts that give the holder the right, but not the obligation, to buy or
sell the underlying instrument at a specified price on or before a specified future date. Although
the holder (also called the buyer) of the option is not obligated to exercise the option, the
option writer (known as the seller) has an obligation to buy or sell the underlying instrument if
the option is exercised. The price, or cost, of an option is an amount of money known as the
premium. The buyer pays this premium to the seller in exchange for the right granted by the
option. An option premium is its cost how much the particular option is worth to the buyer and
seller.
The option premium is the price the option buyer pays to the seller in order to have the right
granted by the option, and it is the money the seller receives in exchange for writing the option.
The theoretical value of an option, on the other hand, is the estimated value of an option a price
generated by means of a model. It is what an option should currently be worth using all the
known inputs, such as the underlying price, strike and days until expiration.
Option traders utilize various option price models to attempt to set a current theoretical value.
Option pricing theory has made vast strides since 1972, when Black and Scholes published their
path-breaking paper providing a model for valuing European options. Black and Scholes used a
replicating portfolio a portfolio composed of the underlying asset and the risk-free asset that
had the same cash flows as the option being valued to come up with their final formulation.
While their derivation is mathematically complicated, there is a simpler binomial model for
valuing options that draws on the same logic.
This project report is based on an attempt to study the valuation of options by implementing
Binomial Option Pricing Model and Black Scholes Option Pricing Model to 30 Stocks of NSE.
Further, the theoretical value of an option is compared to the option premium for those 30 stocks
in order to find the accuracy of these models.









Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 5

1. Introduction
An option provides the holder with the right to buy or sell a specified quantity of an underlying
asset at a fixed price (called a strike price or an exercise price) at or before the expiration date of
the option. Since it is a right and not an obligation, the holder can choose not to exercise the right
and allow the option to expire. There are two types of options viz., call options and put options.
A call option gives the buyer of the option the right to buy the underlying asset at a fixed price,
called the strike or the exercise price, at any time prior to the expiration date of the option. The
buyer pays a price for this right. If at expiration, the value of the asset is less than the strike price,
the option is not exercised and expires worthless. If, on the other hand, the value of the asset is
greater than the strike price, the option is exercised the buyer of the option buys the asset
[stock] at the exercise price. And the difference between the asset value and the exercise price
comprises the gross profit on the option investment. The net profit on the investment is the
difference between the gross profit and the price paid for the call initially.

A payoff diagram illustrates the cash payoff on an option at expiration. For a call, the net payoff
is negative (and equal to the price paid for the call) if the value of the underlying asset is less
than the strike price. If the price of the underlying asset exceeds the strike price, the gross payoff
is the difference between the value of the underlying asset and the strike price and the net payoff
is the difference between the gross payoff and the price of the call. This is illustrated in Figure 1
below:
















Figure 1: Payoff on Call Option

A put option gives the buyer of the option the right to sell the underlying asset at a fixed price,
again called the strike or exercise price, at any time prior to the expiration date of the option. The
buyer pays a price for this right. If the price of the underlying asset is greater than the strike
price, the option will not be exercised and will expire worthless. If on the other hand, the price of
the underlying asset is less than the strike price, the owner of the put option will exercise the
option and sell the stock at the strike price, claiming the difference between the strike price and
the market value of the asset as the gross profit. Again, netting out the initial cost paid for the put
If asset value<strike price, the
amount paid for the call is lost
Price of Underlying Asset
Net Payoff on
Call option
Strike Price
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 6

yields the net profit from the transaction. A put has a negative net payoff if the value of the
underlying asset exceeds the strike price, and has a gross payoff equal to the difference between
the strike price and the value of the underlying asset if the asset value is less than the strike price.
This is summarized in Figure 2 below:

















Figure 2: Payoff on Put Option


An option pricing model is a mathematical formula or model into which the following
parameters are inserted:
- underlying stock or index price
- exercise price of the option
- expiry date of the option
- expected dividends (in cents for a stock, or as a yield for an index) to be paid over the life
of the option
- expected risk free interest rate over the life of the option
- expected volatility of the underlying stock or index over the life of the option
- When the formula is applied to these variables, the resulting figure is called the
theoretical fair value of the option.
Option traders utilize various option price models to attempt to set a current theoretical value.
Variables will fluctuate over the life of the option, and the option position's theoretical value will
adapt to reflect these changes. Most professional traders and investors who trade significant
option positions rely on theoretical value updates to monitor the changing risk and value of
option positions and to assist with trading decisions.
The value of an option is determined by a number of variables relating to the underlying asset
and financial markets.
If asset value>strike price, the
amount paid for the put is lost
Price of Underlying Asset
Net Payoff on
Put option
Strike Price
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 7

- Current Value of the Underlying Asset: Options are assets that derive value from an
underlying asset. Consequently, changes in the value of the underlying asset affect the
value of the options on that asset. Since calls provide the right to buy the underlying asset
at a fixed price, an increase in the value of the asset will increase the value of the calls.
Puts, on the other hand, become less valuable as the value of the asset increase.

- Variance in Value of the Underlying Asset: The buyer of an option acquires the right to
buy or sell the underlying asset at a fixed price. The higher the variance in the value of
the underlying asset, the greater will the value of the option be1. This is true for both
calls and puts. While it may seem counter-intuitive that an increase in a risk measure
(variance) should increase value, options are different from other securities since buyers
of options can never lose more than the price they pay for them; in fact, they have the
potential to earn significant returns from large price movements.

- Dividends Paid on the Underlying Asset: The value of the underlying asset can be
expected to decrease if dividend payments are made on the asset during the life of the
option. Consequently, the value of a call on the asset is a decreasing function of the size
of expected dividend payments, and the value of a put is an increasing function of
expected dividend payments. There is a more intuitive way of thinking about dividend
payments, for call options. It is a cost of delaying exercise on in-the-money options. To
see why, consider an option on a traded stock. Once a call option is in the money, i.e., the
holder of the option will make a gross payoff by exercising the option, exercising the call
option will provide the holder with the stock and entitle him or her to the dividends on
the stock in subsequent periods. Failing to exercise the option will mean that these
dividends are foregone.

- Strike Price of Option: A key characteristic used to describe an option is the strike price.
In the case of calls, where the holder acquires the right to buy at a fixed price, the value
of the call will decline as the strike price increases. In the case of puts, where the holder
has the right to sell at a fixed price, the value will increase as the strike price increases.

- Time to Expiration on Option: Both calls and puts become more valuable as the time to
expiration increases. This is because the longer time to expiration provides more time for
the value of the underlying asset to move, increasing the value of both types of options.
Additionally, in the case of a call, where the buyer has to pay a fixed price at expiration,
the present value of this fixed price decreases as the life of the option increases,
increasing the value of the call.

- Risk Free I nterest Rate Corresponding To Life of Option: Since the buyer of an option
pays the price of the option up front, an opportunity cost is involved. This cost will
depend upon the level of interest rates and the time to expiration on the option. The
riskless interest rate also enters into the valuation of options when the present value of the
exercise price is calculated, since the exercise price does not have to be paid (received)
until expiration on calls (puts). Increases in the interest rate will increase the value of
calls and reduce the value of puts.
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 8

Effect on
Factor Call Value Put Value
Increase in underlying assets value Increases Decreases
Increase in strike price Decreases Increases
Increase in variance of underlying asset Increases Increases
Increase in time to expiration Increases Increases
Increase in interest rates Increases Decreases
Increase in dividends paid Decreases Increases
Table 1: Summary of Variables Affecting Call and Put Prices

There are two main models used in the market for pricing options: the Binomial Model and the
Black Scholes model. For most traders these two models will give accurate enough results from
which to work.
The Binomial Option Pricing Model
First proposed by Cox, Ross and Rubinstein in a paper published in 1979, this solution to pricing
an option is probably the most common model used for equity calls and puts today.
The model divides the time to an options expiry into a large number of intervals, or steps. At
each interval it calculates that the stock price will move either up or down with a given
probability and also by an amount calculated with reference to the stocks volatility, the time to
expiry and the risk free interest rate. A binomial distribution of prices for the underlying stock or
index is thus produced.
The model reduces possibilities of price changes, removes the possibility for arbitrage, assumes a
perfectly efficient market, and shortens the duration of the option. Under these simplifications, it
is able to provide a mathematical valuation of the option at each point in time specified.
The binomial model takes a risk-neutral approach to valuation. It assumes that underlying
security prices can only either increase or decrease with time until the option expires worthless.
Due to its simple and iterative structure, the model presents certain unique advantages. For
example, since it provides a stream of valuations for a derivative for each node in a span of time,
it is useful for valuing derivatives such as American options which allow the owner to exercise
the option at any point in time until expiration (unlike European options which are exercisable
only at expiration). The model is also somewhat simple mathematically when compared to
counterparts such as the Black-Scholes model, and is therefore relatively easy to build and
implement with a computer spreadsheet.
The Black Scholes Model
First proposed by Black and Scholes in a paper published in 1973, this analytic solution to
pricing a European option on a non dividend paying asset formed the foundation for much theory
in derivatives finance. The Black Scholes formula is a continuous time analogue of the binomial
model.

The Black Scholes formula uses the pricing inputs to analytically produce a theoretical fair value
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 9

for an option. The model has many variations which attempt, with varying levels of accuracy, to
incorporate dividends and American style exercise conditions. However with computing power
these days the binomial solution is more widely used.
The major limitation of Black-Scholes model is that it cannot be used to accurately price options
with an American-style exercise as it only calculates the option price at one point in time at
expiration. It does not consider the steps along the way where there could be the possibility of
early exercise of an American option.
As all exchange traded equity options have American-style exercise (i.e. they can be exercised at
any time as opposed to European options which can only be exercised at expiration) this is a
significant limitation.

















Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 10

2. Literature Review
2.1. Backus, David K. and Foresi, Silverio and Wu, Liuren, Accounting for Biases in Black-
Scholes (August 31, 2004).
It is known that the prices of options commonly differ from the Black-Scholes formula with
respect to two parameters i.e. implied volatilities vary by strike price and maturity. Both these
parameters are accounted for using Gram-Charlier expansions to approximate the conditional
distribution of the logarithm of the price of the underlying security. Here, volatility is
approximately a quadratic function of moneyness, a result used to infer skewness and kurtosis
from implied volatilities variations. Evidence suggests that both kurtosis in currency prices
and biases in Black-Scholes option prices decline with maturity.
2.2. Buraschi, Andrea and Jackwerth, Jens Carsten, Is Volatility Risk Priced in the Option
Market? (March 1999).
Rubinstein (1994) shows evidence of a significant time pattern in the shape of the volatility smile
after the crash of 1987 and proposes an implied binomial tree approach to overcome the
empirical limitations of the Black and Scholes model. This approach, and more generally the
class of generalized deterministic volatility models, is based on the assumption that the local
volatility of the underlying asset is a known function of time and of the path and level of the
underlying asset price. In these economies, options are redundant assets. This observation is used
as a testable restriction and three questions are asked. First, is the observed dynamics of the smile
consistent with deterministic volatility models? Second, if volatility is stochastic, so that two
assets cannot dynamically complete the market, is volatility also priced and if so how
important is to model explicitly the price of volatility in the design of risk management
strategies? This question is addressed by testing if the returns on the underlying and on at-the-
money options span the asset prices in the economy or if additional information is needed from
returns on other options or the risk free rate. Third, are there any differences in the spanning
properties of the option market before and after the 1987 market crash?

For these three questions tests are conducted based on daily S&P500 index options data from
April 1986--December 1995. All the tests suggest that in and out of the money options
are needed for spanning purposes. This finding is even stronger in the post crash period and
suggests that returns on away from the money options are driven by at least one additional
economic factor compared to returns on at the money options. This finding is inconsistent
with the implications of deterministic volatility models based on generalized deterministic
volatility.
2.3. Chance, Don M., A Synthesis of Binomial Option Pricing Models for Lognormally
Distributed Assets (November 20, 2007).
The finance literature has revealed no fewer than 11 alternative versions of
the binomial option pricing model for pricing options on lognormally distributed assets. These
models are derived under a variety of assumptions and in some cases require unnecessary
information. This paper provides a review and synthesis of these models, showing their
commonalities and differences and demonstrating how 11 diverse models all produce the same
result in the limit. Some of the models admit arbitrage with a finite number of time steps and
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 11

some fail to capture the correct volatility. This paper also examines the convergence properties
of each model and finds that none exhibit consistently superior performance over the others.
Finally, it demonstrates how a general model that accepts any arbitrage-free risk neutral
probability will reproduce the Black-Scholes-Merton model in the limit.
2.4. Feng, Yi and Kwan, Clarence C. Y. (2012) "Connecting Binomial and Black-Scholes
Option Pricing Models: A Spreadsheet-Based Illustration," Spreadsheets in Education
(eJ SiE): Vol. 5: Iss. 3, Article 2.
The Black-Scholes option pricing model is part of the modern financial curriculum, even at the
introductory level. However, as the derivation of the model, which requires advanced
mathematical tools, is well beyond the scope of standard finance textbooks, the model has
remained a great, but mysterious, recipe for many students. This paper illustrates, from a
pedagogic perspective, how a simple binomial model, which converges to the Black-Scholes
formula, can capture the economic insight in the original derivation. Microsoft Excel plays an
important pedagogic role in connecting the two models. The interactivity as provided by scroll
bars, in conjunction with Excel's graphical features, will allow students to visualize the impacts
of individual input parameters on option pricing.
2.5. Subrahmanyam, Marti G. and Peterson, Sandra and Stapleton, Richard C., An
Arbitrage-Free Two-Factor Model of the Term Structure of Interest Rates: A Multivariate
Binomial Approach (May 1998). NYU Working Paper No. FIN-98-070.
A no-arbitrage model of the term structure is built using two stochastic factors on each date, the
short term interest rate and the forward premium. The model is essentially an extension to two
factors of the lognormal interest rate model of Black Karazinski. It allows for mean reversion
in the short rate and in the forward premium. The method is computationally efficient for several
reasons. First, interest rates are defined on a bankers' discount basis, as linear functions of zero
coupon bond prices, enabling us to use the no-arbitrage condition to compute bond prices
without resorting to cumbersome iterative methods. Second, the multivariate binomial
methodology of Ho Stapleton Subrahmanyam is extended so that a multi period tree of
rates with the no arbitrage property can be constructed using analytical methods. The method
uses a recombining two-dimensional binomial lattice of interest rates that minimizes the number
of states and term structures. Third, the problem of computing a large number of term structures
is simplified by using a limited number of bucket rates in each term structure scenario. In
addition to these computational advantages, a key feature of the model is that it is consistent
with the observed term structure of volatilities implied by the prices of interest rate caps and
floors.
2.6. Vorst, Ton and Menkveld, Albert J., A Pricing Model for American Options with
Stochastic Interest Rates.
In this paper a new methodology to price American put options under stochastic interest rates is
introduced. The method is a combination of an analytic approach and a binomial tree approach.
A binomial tree for the forward risk adjusted tree is constructed and calculates analytically the
expected early exercise value in each point. For American puts with stochastic interest rates the
correlation between the stock price process and the interest rate process has different influences
on the European option values and the early exercise premiums. This result in a non monotonic
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 12

relation between this correlation and the American put option value. Furthermore, there is
evidence that the early exercise premium due to stochastic interest rates is much larger than
established before by other researchers.






















Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 13

3. Research Methodology
An attempt to study the financial models Binomial Option Pricing Model and Black Scholes
Option Pricing Model with reference to option pricing is done. Secondary Data is used for the
research purpose. Secondary data is collected from NSE website as well as from various research
papers, reports, books, Journals, Magazines, and News Papers etc.
The above mentioned option pricing models are applied to 30 stocks listed in NSE. The
theoretical fair value for both call and put of these 30 stocks is calculated and compared to the
actual values.
In order to calculate the theoretical values for both the option pricing models, Microsoft Excel
plays an important pedagogic role.



















Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 14

3.1. The Binomial Option Pricing Model
In order to carry out the analysis, the two step binomial tree is considered. The calculation of
option price is done as follows:
- Consider the stock price at t
0
to be S
0
. In the Binomial Method, the price can go either up
or down. At t
1
(after one time interval), the price can either be an up price or a down
price. These prices can each go either up or down over the course of the next time
interval.
- As we see that the possible prices quickly branch out over time, hence the term
Binomial Tree is used for this technique.
- By making the number of time intervals between t
0
and time of expiry T very large, we
will get many possible stock prices at T and we will have a better approximation of the
Brownian Random Walk, which is a time continuous model.








Figure 3: Two Step Binomial Tree

- In order to get from S
0
to S
u
, we have to multiply S
0
by whats called the up ratio, labeled
u. Similarly, to get from S
0
to S
d
, we have to multiply S
0
by the down ratio, labeled d.
These factors are constant throughout the tree.
- Also, if the stock takes an up move followed by a down move, itll arrive at the same
price had the stock taken a down move followed by an up move. Hence, the order does
not matter.
- u and d depend on two things: volatility of the stock and the length of a time interval.
Cox, Ross, and Rubinstein chose the up and down ratios to be these:



- Because d is the reciprocal of u, u*d = 1. Therefore, if S
0
takes an up move followed by a
down move or vice versa, the price will return to S
0
.
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 15

- If the probability of S
0
rising to S
u
is p, then the probability of S
0
falling to S
d
must be 1-
p, since one of those two outcomes must happen in this model.
- We can say that the expected price at t
1
is the probability of the up move happening p
times the up price plus the probability of the down move happening (1-p) times the down
price.








- In order to make the Binomial Method to be risk neutral, a riskless asset should grow by a
factor of after delta t, with r as the risk free interest rate.
- So the expected value of S
0
is:
S
0
=
- Also p is given as follows:


- This is the risk-neutral transition probability of an up move.
- The u and d only depend on the volatility and the length of the time interval, so this
probability only depends on volatility, the length of a time interval, and the riskless
interest rate. All of these will remain constant throughout our binomial tree, so this
probability will remain constant throughout the tree as well.
- In order to calculate the call values, the Strike Price is subtracted from the Stock Price. If
the value obtained from subtracting the Strike Price from the Stock Price is less than zero,
then the value is considered to be zero.
- In order to calculate the pull values, the Stock Price is subtracted from the Strike Price. If
333the value obtained from subtracting the Stock Price from the Strike Price is less than
zero, then the value is considered to be zero.
- Thus, the theoretical values for call and put are calculated by using Binomial Option
Pricing Model.


Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 16

3.2. The Black Scholes Option Pricing Model
The Black Scholes Option Pricing Model is used for the European options which can only be
exercised at the expiration. The formula for Black Scholes Option Pricing Model:









The variable definitions are as follows:
- S: current stock price
- K: option strike price
- E: base of natural logarithms
- R: risk free interest rate
- T: time until option expiration
- o: Standard deviation (sigma) of returns on the underlying security
- ln: natural logarithm
- N(d
1
) and N(d
2
): Cumulative standard normal distribution functions
The cumulative distribution is shown in Figure 4:








T d d
T
T R
K
S
d
d SN d N Ke Put
d N Ke d SN Call
RT
RT
o
o
o
=
|
|
.
|

\
|
+ +
|
.
|

\
|
=
=
=

1 2
2
1
1 2
2 1
and
2
ln
where
) ( ) (
) ( ) (
Figure 4: Cumulative Distribution
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 17

In approximate terms, these probabilities yield the likelihood that an option will generate positive
cash flows for its owner at exercise, i.e., when S>K in the case of a call option and when K>S in
the case of a put option. The portfolio that replicates the call option is created by buying N(d1)
units of the underlying asset, and borrowing Ke
-rt
N(d2). The portfolio will have the same cash
flows as the call option and thus the same value as the option.
The assumptions of the Black-Scholes Model are as follows:
- The stock pays no dividends during the options life
If Black Scholes Option Pricing Model is applied to two securities, one with no
dividends and the other with a dividend yield, the model will predict the same call
premium

- European exercise style
A European option can only be exercised on the expiration date

- Markets are efficient
The Black Scholes Option Pricing Model assumes informational efficiency.
No one can predict the direction of the market or of an individual stock. Put/call
parity implies that everyone agrees on the option premium, regardless of whether
the market is bullish or bearish

- No transaction costs
There are no commissions and bid-ask spreads

- Interest rates remain constant
Often the 30-day T-bill rate is used

- Prices are lognormally distributed
The logarithms of the underlying security prices are normally distributed
This is a reasonable assumption for most assets on which options are available







Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 18

4. Data Analysis
The option prices for the 30 stocks listed in NSE are calculated by the Binomial Option Pricing
Model and the Black Scholes Option Pricing Model. These theoretical values for each stock are
compared with their actual values to find out the accuracy of each model.
1. Company: ACC Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
1100 1136.4 8.77% 31.82% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 117.27 49.18
Black Scholes Option Pricing Model 87.42 35.05
Actual Premium according to NSE 14 108.35
Table 2: Information about ACC Limited

Figure 5: Comparison of theoretical values and actual premium for call and put option for
ACC Limited
For ACC Limited, it is observed that the value of call by Black Scholes Option Pricing Model is
closer to the actual premium according to NSE and the value of put by Binomial Option Pricing
Model is closer to the actual premium according to NSE.
117.27
49.18
87.42
35.05
14
108.35
0
20
40
60
80
100
120
140
Value of Call Value of Put
ACC Limited
Binomial Option Pricing
Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 19

2. Company: Adani Enterprises Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
250 268.6 8.77% 51.56% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 44.98 19.18
Black Scholes Option Pricing Model 34.48 12.25
Actual Premium according to NSE 20 32.55
Table 3: Information about Adani Enterprises Limited

Figure 6: Comparison of theoretical values and actual premium for call and put option for
Adani Enterprises Limited
For Adani Enterprises Limited, it is observed that the value of call by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE and the value of put by Black
Binomial Option Pricing Model is closer to the actual premium according to NSE.
44.98
19.18
34.48
12.25
20
32.55
0
5
10
15
20
25
30
35
40
45
50
Value of Call Value of Put
Adani Enterprises Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 20

3. Company: Ambuja Cements Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
175 168.5 8.77% 38.60% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 13.97 15.43
Black Scholes Option Pricing Model 8.84 12.8
Actual Premium according to NSE 5.2 19.2
Table 4: Information about Ambuja Cements Limited

Figure 7: Comparison of theoretical values and actual premium for call and put option for
Ambuja Cements Limited
For Ambuja Cements Limited, it is observed that the value of call by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
13.97
15.43
8.84
12.8
5.2
19.2
0
5
10
15
20
25
Value of Call Value of Put
Ambuja Cements Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 21

4. Company: Ashok Leyland Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
15 15.65 8.77% 31.41% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 1.71 0.63
Black Scholes Option Pricing Model 1.28 0.41
Actual Premium according to NSE 2.15 0.65
Table 5: Information about Ashok Leyland Limited

Figure 8: Comparison of theoretical values and actual premium for call and put option for
Ashok Leyland Limited
For Ashok Leyland Limited, it is observed that the value of both call and put by Binomial Option
Pricing Model is closer to the actual premium according to NSE.
1.71
0.63
1.28
0.41
2.15
0.65
0
0.5
1
1.5
2
2.5
Value of Call Value of Put
Ashok Leyland Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 22

5. Company: Bharti Airtel Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
330 287.4 8.77% 29.55% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 9.8 42.89
Black Scholes Option Pricing Model 2.92 40.73
Actual Premium according to NSE 12.45 26.9
Table 6: Information about Bharti Airtel Limited

Figure 9: Comparison of theoretical values and actual premium for call and put option for
Bharti Airtel Limited
For Bharti Airtel Limited, it is observed that the value of call by Binomial Option Pricing Model
is closer to the actual premium according to NSE and the value of put by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE.
9.8
42.89
2.92
40.73
12.45
26.9
0
5
10
15
20
25
30
35
40
45
50
Value of Call Value of Put
Bharti Airtel Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 23

6. Company: Cipla Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
400 378.65 8.77% 35.78% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 27.46 37.28
Black Scholes Option Pricing Model 15.57 31.11
Actual Premium according to NSE 31.05 9.2
Table 7: Information about Cipla Limited

Figure 10: Comparison of theoretical values and actual premium for call and put option for
Cipla Limited
For Cipla Limited, it is observed that the value of call by Binomial Option Pricing Model is
closer to the actual premium according to NSE and the value of put by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE.
27.46
37.28
15.57
31.11 31.05
9.2
0
5
10
15
20
25
30
35
40
Value of Call Value of Put
Cipla Limited
Binomial Option Pricing
Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 24

7. Company: DLF Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
150 140.7 8.77% 38.28% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 10.6 15.58
Black Scholes Option Pricing Model 5.86 12.99
Actual Premium according to NSE 4.65 22.8
Table 8: Information about DLF Limited

Figure 11: Comparison of theoretical values and actual premium for call and put option for
DLF Limited
For DLF Limited, it is observed that the value of call by Black Scholes Option Pricing Model is
closer to the actual premium according to NSE and the value of put by Binomial Option Pricing
Model is closer to the actual premium according to NSE.
10.6
15.58
5.86
12.99
4.65
22.8
0
5
10
15
20
25
Value of Call Value of Put
DLF Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 25

8. Company: Dr. Reddys Laboratories Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
2900 2802.6 8.77% 29.43% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 181.87 195.72
Black Scholes Option Pricing Model 109.7 165.02
Actual Premium according to NSE 19.5 238.95
Table 9: Information about Dr. Reddys Laboratories Limited

Figure 12: Comparison of theoretical values and actual premium for call and put option for
Dr. Reddys Laboratories Limited
For Dr. Reddys Laboratories Limited, it is observed that the value of call by Black Scholes
Option Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
181.87
195.72
109.7
165.02
19.5
238.95
0
50
100
150
200
250
300
Value of Call Value of Put
Dr. Reddy's Laboratories Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 26

9. Company: Exide Industries Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
120 113 8.77% 25.68% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 5.56 9.1
Black Scholes Option Pricing Model 2.65 7.91
Actual Premium according to NSE 2.1 18.95
Table 10: Information about Exide Industries Limited

Figure 13: Comparison of theoretical values and actual premium for call and put option for
Exide Industries Limited
For Exide Industries Limited, it is observed that the value of call by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
5.56
9.1
2.65
7.91
2.1
18.95
0
2
4
6
8
10
12
14
16
18
20
Value of Call Value of Put
Exide Industries Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 27

10. Company: The Federal Bank Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
850 79.65 8.77% 37.21% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 5.8 8.7
Black Scholes Option Pricing Model 3.15 7.27
Actual Premium according to NSE 3.9 9.95
Table 11: Information about The Federal Bank Limited

Figure 14: Comparison of theoretical values and actual premium for call and put option for
The Federal Bank Limited
For The Federal Bank Limited, it is observed that the value of call by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
5.8
8.7
3.15
7.27
3.9
9.95
0
2
4
6
8
10
12
Value of Call Value of Put
The Federal Bank Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 28

11. Company: Housing Development Finance Corporation Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
900 821.1 8.77% 26.11% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 33.19 86.16
Black Scholes Option Pricing Model 12.47 78.31
Actual Premium according to NSE 20 72
Table 12: Information about Housing Development Finance Corporation Limited

Figure 15: Comparison of theoretical values and actual premium for call and put option for
Housing Development Finance Corporation Limited
For Housing Development Finance Corporation Limited, it is observed that the value of both call
and put by Black Scholes Option Pricing Model is closer to the actual premium according to
NSE.
33.19
86.16
12.47
78.31
20
72
0
10
20
30
40
50
60
70
80
90
100
Value of Call Value of Put
Housing Development Finance
Corporation Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 29

12. Company: ICICI Bank Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
1100 1068 8.77% 32.26% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 76.95 77.26
Black Scholes Option Pricing Model 48.83 64.87
Actual Premium according to NSE 39.55 56.15
Table 13: Information about ICICI Bank Limited

Figure 16: Comparison of theoretical values and actual premium for call and put option for
ICICI Bank Limited
For ICICI Bank Limited, it is observed that the value of both call and put by Black Scholes
Option Pricing Model is closer to the actual premium according to NSE.
76.95 77.26
48.83
64.87
39.55
56.15
0
10
20
30
40
50
60
70
80
90
Value of Call Value of Put
ICICI Bank Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 30

13. Company: IDFC Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
100 99.8 8.77% 34.55% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 8.38 5.7
Black Scholes Option Pricing Model 6.22 4.97
Actual Premium according to NSE 4.5 11.2
Table 14: Information about IDFC Limited

Figure 17: Comparison of theoretical values and actual premium for call and put option for
IDFC Limited
For IDFC Limited, it is observed that the value of call by Black Scholes Option Pricing Model is
closer to the actual premium according to NSE and the value of put by Binomial Option Pricing
Model is closer to the actual premium according to NSE.
8.38
5.7
6.22
4.97
4.5
11.2
0
2
4
6
8
10
12
Value of Call Value of Put
IDFC Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 31

14. Company: Infosys Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
3800 3799 8.77% 19.05% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 205.06 96.58
Black Scholes Option Pricing Model 146.05 91.91
Actual Premium according to NSE 172.25 111.9
Table 15: Information about Infosys Limited

Figure 18: Comparison of theoretical values and actual premium for call and put option for
Infosys Limited
For Infosys Limited, it is observed that the value of call by Black Scholes Option Pricing Model
is closer to the actual premium according to NSE and the value of put by Binomial Option
Pricing Model is closer to the actual premium according to NSE.
205.06
96.58
146.05
91.91
172.25
111.9
0
50
100
150
200
250
Value of Call Value of Put
Infosys Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 32

15. Company: Jindal Steel & Power Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
280 248.7 8.77% 38.36% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 15.06 38.29
Black Scholes Option Pricing Model 6.22 33.45
Actual Premium according to NSE 7.3 31.55
Table 16: Information about Jindal Steel & Power Limited

Figure 19: Comparison of theoretical values and actual premium for call and put option for
Jindal Steel & Power Limited
For Jindal Steel & Power Limited, it is observed that the value of both call and put by Black
Scholes Option Pricing Model is closer to the actual premium according to NSE.
15.06
38.29
6.22
33.45
7.3
31.55
0
5
10
15
20
25
30
35
40
45
Value of Call Value of Put
Jindal Steel & Power Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 33

16. Company: Kotak Mahindra Bank Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
740 676.3 8.77% 30.91 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 35.14 77.52
Black Scholes Option Pricing Model 14.99 67.95
Actual Premium according to NSE 16.1 90.55
Table 17: Information about Kotak Mahindra Bank Limited

Figure 20: Comparison of theoretical values and actual premium for call and put option for
Kotak Mahindra Bank Limited
For Kotak Mahindra Bank Limited, it is observed that the value of call by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
35.14
77.52
14.99
67.95
16.1
90.55
0
10
20
30
40
50
60
70
80
90
100
Value of Call Value of Put
Kotak Mahindra Bank Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 34

17. Company: LIC Housing Finance Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
210 208.15 8.77% 30.57% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 15.45 11.25
Black Scholes Option Pricing Model 10.93 9.73
Actual Premium according to NSE 8.45 21.35
Table 18: Information about LIC Housing Finance Limited

Figure 21: Comparison of theoretical values and actual premium for call and put option for
LIC Housing Finance Limited
For LIC Housing Finance Limited, it is observed that the value of call by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
15.45
11.25
10.93
9.73
8.45
21.35
0
5
10
15
20
25
Value of Call Value of Put
LIC Housing Finance Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 35

18. Company: Mahindra & Mahindra

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
1000 954 8.77% 29.50% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 58.53 75.72
Black Scholes Option Pricing Model 32.49 63.98
Actual Premium according to NSE 12.8 123.95
Table 19: Information about Mahindra & Mahindra

Figure 22: Comparison of theoretical values and actual premium for call and put option for
Mahindra & Mahindra
For Mahindra & Mahindra, it is observed that the value of call by Black Scholes Option Pricing
Model is closer to the actual premium according to NSE and the value of put by Binomial Option
Pricing Model is closer to the actual premium according to NSE.
58.53
75.72
32.49
63.98
12.8
123.95
0
20
40
60
80
100
120
140
Value of Call Value of Put
Mahindra & Mahindra
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 36

19. Company: Maruti Suzuki India Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility
()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
1700 1600.05 8.77% 39.51 % 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 126.22 177.19
Black Scholes Option Pricing Model 71.86 147.14
Actual Premium according to NSE 161.15 189.65
Table 20: Information about Maruti Suzuki India Limited

Figure 23: Comparison of theoretical values and actual premium for call and put option for
Maruti Suzuki India Limited
For Maruti Suzuki India Limited, it is observed that the value of both call and put by Binomial
Option Pricing Model is closer to the actual premium according to NSE.
126.22
177.19
71.86
147.14
161.15
189.65
0
20
40
60
80
100
120
140
160
180
200
Value of Call Value of Put
Maruti Suzuki India Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 37

20. Company: Oil & Natural Gas Corporation Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
300 296.4 8.77% 28.79% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 20.68 15.64
Black Scholes Option Pricing Model 14.25 13.49
Actual Premium according to NSE 7.7 29.2
Table 21: Information about Oil & Natural Gas Corporation Limited

Figure 24: Comparison of theoretical values and actual premium for call and put option for
Oil & Natural Gas Corporation Limited
For Oil & Natural Gas Corporation Limited, it is observed that the value of call by Black Scholes
Option Pricing Model is closer to the actual premium according to NSE and the value of put by
Binomial Option Pricing Model is closer to the actual premium according to NSE.
20.68
15.64
14.25
13.49
7.7
29.2
0
5
10
15
20
25
30
35
Value of Call Value of Put
Oil & Natural Gas Corporation Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 38

21. Company: Punjab National Bank

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
600 564.8 8.77% 39.04% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 44.01 61.92
Black Scholes Option Pricing Model 24.97 51.46
Actual Premium according to NSE 25.1 94.9
Table 22: Information about Punjab National Bank

Figure 25: Comparison of theoretical values and actual premium for call and put option for
Punjab National Bank
For Punjab National Bank, it is observed that the value of call by Black Scholes Option Pricing
Model is closer to the actual premium according to NSE and the value of put by Binomial Option
Pricing Model is closer to the actual premium according to NSE.
44.01
61.92
24.97
51.46
25.1
94.9
0
10
20
30
40
50
60
70
80
90
100
Value of Call Value of Put
Punjab National Bank
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 39

22. Company: Ranbaxy Laboratories Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
400 362.3 8.77% 61.95% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 42.33 68.51
Black Scholes Option Pricing Model 24.2 56.09
Actual Premium according to NSE 41.35 109.85
Table 23: Information about Ranbaxy Laboratories Limited

Figure 26: Comparison of theoretical values and actual premium for call and put option for
Ranbaxy Laboratories Limited
For Ranbaxy Laboratories Limited, it is observed that the value of both call and put by Binomial
Option Pricing Model is closer to the actual premium according to NSE.
42.33
68.51
24.2
56.09
41.35
109.85
0
20
40
60
80
100
120
Value of Call Value of Put
Ranbaxy Laboratories Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 40

23. Company: Reliance Communications Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
130 111.7 8.77% 47.55% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 8.06 22.62
Black Scholes Option Pricing Model 3.27 19.68
Actual Premium according to NSE 8.25 14
Table 24: Information about Reliance Communications Limited

Figure 27: Comparison of theoretical values and actual premium for call and put option for
Reliance Communications Limited
For Reliance Communications Limited, it is observed that the value of call by Binomial Option
Pricing Model is closer to the actual premium according to NSE and the value of put by Black
Scholes Option Pricing Model is closer to the actual premium according to NSE.
8.06
22.62
3.27
19.68
8.25
14
0
5
10
15
20
25
Value of Call Value of Put
Reliance Communications Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 41

24. Company: Sun Pharmaceuticals Industries Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
670 620.15 8.77% 29.06% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 31.97 62.52
Black Scholes Option Pricing Model 14.34 54.47
Actual Premium according to NSE 10.6 72.95
Table 25: Information about Sun Pharmaceuticals Industries Limited

Figure 28: Comparison of theoretical values and actual premium for call and put option for
Sun Pharmaceuticals Industries Limited
For Sun Pharmaceuticals Industries Limited, it is observed that the value of call by Black
Scholes Option Pricing Model is closer to the actual premium according to NSE and the value of
put by Binomial Option Pricing Model is closer to the actual premium according to NSE.
31.97
62.52
14.34
54.47
10.6
72.95
0
10
20
30
40
50
60
70
80
Value of Call Value of Put
Sun Pharmaceuticals Industries Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 42

25. Company: Tata Motors Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
400 413 8.77% 37.75% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 47.11 22.59
Black Scholes Option Pricing Model 35.31 16.5
Actual Premium according to NSE 20 47.9
Table 26: Information about Tata Motors Limited

Figure 29: Comparison of theoretical values and actual premium for call and put option for
Tata Motors Limited
For Tata Motors Limited, it is observed that the value of call by Black Scholes Option Pricing
Model is closer to the actual premium according to NSE and the value of put by Binomial Option
Pricing Model is closer to the actual premium according to NSE.
47.11
22.59
35.31
16.5
20
47.9
0
10
20
30
40
50
60
Value of Call Value of Put
Tata Motors Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 43

26. Company: Tata Consultancy Services Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
2200 2240.2 8.77% 33.43% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 214.46 110.87
Black Scholes Option Pricing Model 159.4 87.27
Actual Premium according to NSE 143 55
Table 27: Information about Tata Consultancy Services Limited

Figure 30: Comparison of theoretical values and actual premium for call and put option for
Tata Consultancy Services Limited
For Tata Consultancy Services Limited, it is observed that the value of both call and put by
Black Scholes Option Pricing Model is closer to the actual premium according to NSE.
214.46
110.87
159.4
87.27
143
55
0
50
100
150
200
250
Value of Call Value of Put
Tata Consultancy Services Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 44

27. Company: Unitech Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
10 11.45 8.77% 45.86% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 2.27 0.53
Black Scholes Option Pricing Model 1.83 0.23
Actual Premium according to NSE 1.9 0.35
Table 28: Information about Unitech Limited

Figure 31: Comparison of theoretical values and actual premium for call and put option for
Unitech Limited
For Unitech Limited, it is observed that the value of both call and put by Black Scholes Option
Pricing Model is closer to the actual premium according to NSE.
2.27
0.53
1.83
0.23
1.9
0.35
0
0.5
1
1.5
2
2.5
Value of Call Value of Put
Unitech Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 45

28. Company: Voltas Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
130 140.35 8.77% 52.24% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 24.13 10.03
Black Scholes Option Pricing Model 18.53 6.3
Actual Premium according to NSE 5.95 26.85
Table 29: Information about Voltas Limited

Figure 32: Comparison of theoretical values and actual premium for call and put option for
Voltas Limited
For Voltas Limited, it is observed that the value of call by Black Scholes Option Pricing Model
is closer to the actual premium according to NSE and the value of put by Binomial Option
Pricing Model is closer to the actual premium according to NSE.
24.13
10.03
18.53
6.3
5.95
26.85
0
5
10
15
20
25
30
Value of Call Value of Put
Voltas Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 46

29. Company: Yes Bank Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
400 321 8.77% 35.13% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 7.12 74.6
Black Scholes Option Pricing Model 1.73 74.93
Actual Premium according to NSE 7.9 93.2
Table 30: Information about Yes Bank Limited

Figure 33: Comparison of theoretical values and actual premium for call and put option for
Yes Bank Limited
For Yes Bank Limited, it is observed that the value of call by Binomial Option Pricing Model is
closer to the actual premium according to NSE and the value of put by black Scholes Option
Pricing Model is closer to the actual premium according to NSE.
7.12
74.6
1.73
74.93
7.9
93.2
0
10
20
30
40
50
60
70
80
90
100
Value of Call Value of Put
Yes Bank Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 47

30. Company: Zee Entertainment Enterprises Limited

Strike
Price
(K)
Stock
Price
(S)
Risk Free
Rate of
Interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry
Date
Time in
Months
Time
in
years
(T)
260 270.1 8.77% 33.47% 04-Mar-14 24-Apr-14 2 0.167

Value of Call Value of Put
Binomial Option Pricing Model 29.8 12.21
Black Scholes Option Pricing Model 22.32 8.45
Actual Premium according to NSE 18 6
Table 31: Information about Zee Entertainment Enterprises Limited

Figure 34: Comparison of theoretical values and actual premium for call and put option for
Zee Entertainment Enterprises Limited
For Zee Entertainment Enterprises Limited, it is observed that the value of both call and put by
Black Scholes Option Pricing Model is closer to the actual premium according to NSE.
29.8
12.21
22.32
8.45
18
6
0
5
10
15
20
25
30
35
Value of Call Value of Put
Zee Entertainment Enterprises
Limited
Binomial Option
Pricing Model
Black Scholes Option
Pricing Model
Actual Premium
according to NSE
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 48

Call Value Put Value
Sr.
No
.
Company Name Model closer to
the actual
premium
according to NSE
Actual
Premium
according
to NSE
Model closer to
the actual
premium
according to NSE
Actual
Premium
according
to NSE
1. ACC Limited Black Scholes
87.42
14 Binomial
49.18
108.35
2. Adani Enterprises
Limited
Black Scholes
34.48
20

Binomial
19.18
32.55

3. Ambuja Cements
Limited
Black Scholes
8.84
5.2

Binomial
15.43
19.2

4. Ashok Leyland
Limited
Binomial
1.71
2.15

Binomial
0.63
0.65

5. Bharti Airtel
Limited
Binomial
9.8
12.45

Black Scholes
40.73
26.9

6. Cipla Limited Binomial
27.46
31.05 Black Scholes
31.11
9.2
7. DLF Limited Black Scholes
5.86
4.65 Binomial
15.58
22.8
8. Dr. Reddy's
Laboratories
Limited
Black Scholes
109.7

19.5

Binomial
195.72

238.95

9. Exide Industries
Limited
Black Scholes
2.65

2.1

Binomial
9.1

18.95

10. The Federal Bank
Limited
Black Scholes
3.15

3.9

Binomial
8.7

9.95

11. Housing
Development
Finance
Corporation
Limited
Black Scholes
12.47

20

Black Scholes
78.31

72

12. ICICI Bank
Limited
Black Scholes
48.83
39.55 Black Scholes
64.87
56.15
13. IDFC Limited Black Scholes
6.22
4.5 Binomial
5.7
11.2
14. Infosys Limited Black Scholes
146.05
172.25 Binomial
96.58
111.9
15. Jindal Steel &
Power Limited
Black Scholes
6.22
7.3

Black Scholes
33.45
31.55
16. Kotak Mahindra
Bank Limited
Black Scholes
14.99
16.1

Binomial
77.52
90.55

17. LIC Housing
Finance Limited
Black Scholes
10.93
8.45

Binomial
11.25
21.35

18. Mahindra & Black Scholes 12.8 Binomial 123.95
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 49

Mahindra 32.49 75.72
19. Maruti Suzuki
India Limited
Binomial
126.22
161.15

Binomial
177.19
189.65

20. Oil & Natural Gas
Corporation
Limited
Black Scholes
14.25

7.7

Binomial
15.64

29.2

21. Punjab National
Bank
Black Scholes
24.97
25.1

Binomial
61.92
94.9

22. Ranbaxy
Laboratories
Limited
Binomial
42.33

41.35

Binomial
68.51

109.85

23. Reliance
Communications
Limited
Binomial
8.06

8.25

Black Scholes
19.68

14

24. Sun
Pharmaceuticals
Industries Limited
Black Scholes
14.34

10.6

Binomial
62.52

72.95

25. Tata Motors
Limited
Black Scholes
35.31
20 Binomial
22.59
47.9
26. Tata Consultancy
Services Limited
Black Scholes
159.4
143

Black Scholes
87.27
55

27. Unitech Limited Black Scholes
1.83
1.9 Black Scholes
0.23
0.35
28. Voltas Limited Black Scholes
18.53
5.95 Binomial
10.03
26.85
29 Yes Bank Limited Binomial
7.12
7.9 Black Scholes
74.93
93.2
30. Zee Entertainment
Enterprises
Limited
Black Scholes
22.32

18

Black Scholes
8.45

6

Table 32: Comparison of values obtained from Binomial Option Pricing Model and Black
Scholes Option Pricing Model with actual premium according to NSE from 04-Mar-2014 to
24-Apr-2014






Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 50


Sr.
No.
Company Name Strike
Price
(K)
Stock
Price (S)
Risk
free rate
of
interest
(R)
Annualized
Volatility ()
Starting
Date
Expiry Date Time
in
Months
(T)
1. ACC Limited 1100 1136.4 8.77% 31.82% 04-Mar-14 24-Apr-14 2
2. Adani Enterprises
Limited


250


268.6 8.77% 51.56%


04-Mar-14 24-Apr-14


2
3. Ambuja Cements
Limited


175


168.5 8.77% 38.60%


04-Mar-14 24-Apr-14


2
4. Ashok Leyland
Limited

15

15.65 8.77% 31.41%

04-Mar-14 24-Apr-14

2
5. Bharti Airtel
Limited
330 287.4
8.77% 29.55%
04-Mar-14
24-Apr-14

2
6. Cipla Limited 400 378.65 8.77% 35.78% 04-Mar-14 24-Apr-14 2
7. DLF Limited 150 140.7 8.77% 38.28% 04-Mar-14 24-Apr-14 2
8. Dr. Reddy's
Laboratories
Limited


2900


2802.6 8.77% 29.43%


04-Mar-14 24-Apr-14


2
9. Exide Industries
Limited


120


113 8.77% 25.68%


04-Mar-14 24-Apr-14


2
10. The Federal Bank
Limited

850

79.65 8.77% 37.21%

04-Mar-14 24-Apr-14

2
11. Housing
Development
Finance
Corporation
Limited




900




821.1 8.77% 26.11%




04-Mar-14 24-Apr-14




2
12. ICICI Bank
Limited

1100

1068 8.77% 32.26%

04-Mar-14 24-Apr-14

2
13. IDFC Limited 100 99.8 8.77% 34.55% 04-Mar-14 24-Apr-14 2
14. Infosys Limited 3800 3799 8.77% 19.05% 04-Mar-14 24-Apr-14 2
15. Jindal Steel &
Power Limited

280

248.7 8.77% 38.36%

04-Mar-14 24-Apr-14

2
16. Kotak Mahindra
Bank Limited


740


676.3 8.77% 30.91


04-Mar-14 24-Apr-14


2
17. LIC Housing
Finance Limited


210


208.15 8.77% 30.57%


04-Mar-14 24-Apr-14


2
18. Mahindra &
Mahindra

1000

954 8.77% 29.50%

04-Mar-14 24-Apr-14

2
19. Maruti Suzuki
India Limited

1700
1600.0
5 8.77% 39.51 %

04-Mar-14 24-Apr-14

2
20. Oil & Natural
Gas Corporation
Limited



300



296.4 8.77% 28.79%



04-Mar-14 24-Apr-14



2
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 51

21. Punjab National
Bank

600

564.8 8.77% 39.04%

04-Mar-14 24-Apr-14

2
22. Ranbaxy
Laboratories
Limited

400

362.3
8.77% 61.95%

04-Mar-14
24-Apr-14

2
23. Reliance
Communications
Limited


130


111.7 8.77% 47.55%


04-Mar-14 24-Apr-14


2
24. Sun
Pharmaceuticals
Industries
Limited



670



620.15 8.77% 29.06%



04-Mar-14 24-Apr-14



2
25. Tata Motors
Limited

400

413 8.77% 37.75%

04-Mar-14 24-Apr-14

2
26. Tata Consultancy
Services Limited




2200




2240.2 8.77% 33.43%




04-Mar-14 24-Apr-14




2
27. Unitech Limited
10

11.45 8.77% 45.86%

04-Mar-14 24-Apr-14

2
28. Voltas Limited 130 140.35 8.77% 52.24% 04-Mar-14 24-Apr-14 2
29 Yes Bank
Limited

400

321 8.77% 35.13%

04-Mar-14 24-Apr-14

2
30. Zee
Entertainment
Enterprises
Limited



260



270.1 8.77% 33.47%



04-Mar-14 24-Apr-14



2
Table 33: Details of all the 30 stocks









Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 52

5. Conclusion
From the data analysis, it can be seen that for most of the stocks the premium for call is closer to
the theoretical value obtained from the Black Scholes Option Pricing Model and the premium for
put is closer to the theoretical value obtained from Binomial Option Pricing Model.
It should be noted that while quantifiable factors can explain much of the observable price
behavior, supply and demand still play an important part and can override predictive option
values created by using pricing models. A sustained imbalance of competing bids and offers can
drive prices away from theoretically expected values. Imbalances can be caused by factors such
as a sudden political event or unexpected news regarding a particular stock. These factors cannot
be quantified and can have an effect on both option prices and the accuracy of price modeling.
That being said, theoretical options pricing is a valuable tool that helps investors and traders
anticipate price movements for option positions.
















Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 53

6. References and Bibliography
1. Backus, David K. and Foresi, Silverio and Wu, Liuren, Accounting for Biases in Black-
Scholes (August 31, 2004).
2. Buraschi, Andrea and Jackwerth, Jens Carsten, Is Volatility Risk Priced in the Option
Market? (March 1999).
3. Chance, Don M., A Synthesis of Binomial Option Pricing Models for Lognormally
Distributed Assets (November 20, 2007).
4. Feng, Yi and Kwan, Clarence C. Y. (2012) "Connecting Binomial and Black-Scholes
Option Pricing Models: A Spreadsheet-Based Illustration," Spreadsheets in Education
(eJSiE): Vol. 5: Iss. 3, Article 2.
5. Subrahmanyam, Marti G. and Peterson, Sandra and Stapleton, Richard C., An Arbitrage-
Free Two-Factor Model of the Term Structure of Interest Rates: A Multivariate Binomial
Approach (May 1998). NYU Working Paper No. FIN-98-070.
6. Vorst, Ton and Menkveld, Albert J., A Pricing Model for American Options with
Stochastic Interest Rates.
7. Options, Futures and Derivatives, 7
th
Edition by John. C. Hull, Sankarshan Basu
8. http://www.investopedia.com
9. http://en.wikipedia.org
10. http://www.asx.com.au
11. http://www.nseindia.com
12. http://www.ssrn.com













Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 54

7. Appendix
7.1. Black Scholes Option Pricing Model Calculations:
The calculation for finding the theoretical value for call and put option for a stock was done in
Microsoft Excel.
Given below is the screenshot of the excel sheet which shows the calculation for Adani
Enterprises Limited.

Figure 35: Calculation for Black Scholes Option Pricing Model
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 55


The cell formulas used in the excel sheet are as follows:
B8 =B7/12
E3 =EXP(B6*B8)
E4 =EXP(-B6*B8)
E7 =((LN(B4/B3))+((B6+((B10*B10)/2))*B8))/(B10*(SQRT(B8)))
E8 =E7-(B10*SQRT(B8))
E10 =NORMSDIST(E7)
E11 =NORMSDIST(E8)

For Call Value:
B16 =(B4*E10)-(B3*E4*E11)

For Put Value:
B21 =(B4*(E10-1))-(B3*E4*(E11-1))

Table 34: Cell Formulas for Black Scholes Option Pricing Model














Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 56

7.2. Binomial Option Pricing Model Calculations:
The calculation for finding the theoretical value for call and put option for a stock was done in
Microsoft Excel.
Given below is the screenshot of the excel sheet which shows the calculation for Adani
Enterprises Limited.

Figure 36: Calculation for Binomial Option Pricing Model
Comparative study of Binomial Option Pricing Model and Black Scholes Option Pricing Model

Prin. L.N. Welingkar Institute of Management Development & Research, Mumbai Page 57

The cell formulas used in the excel sheet are as follows:
B5 =B4+(B4*E12) E3 =EXP(B11*B13)
B6 =B4-(B4*E13) E4 =EXP(-B11*B13)
B7 =B5+(E12*B5) E6 =(E3-E10)/(E9-E10)
B8 =B5-(B5*E13) E7 =1-E6
B9 =B6-(B6*E13) E9 =EXP(B15*SQRT(B13))
B13 =B12/12 E10 =1/E9
E12 =((E9*100)-100)/100
E13 =(100-(E10*100))/100

For Call Value: For Put Value:

B21 =B7-B3 B34 =B3-B7
B22 =B8-B3 B35 =B3-B8
B23 =B9-B3 B36 =B3-B9
B25 =B5-B3 B38=B3-B5
B26 =B6-B3 B39=B3-B6
B28 =B4-B3 B41=B3-B4
C21 =IF(B21<0,0,B21) C34=IF(B34<0,0,B34)
C22 =IF(B22<0,0,B22) C35=IF(B35<0,0,B35)
C23 =IF(B23<0,0,B23) C36=IF(B36<0,0,B36)
C25 =IF(B25<0,0,B25) C38=IF(B38<0,0,B38)
C26 =IF(B26<0,0,B26) C39=IF(B39<0,0,B39)
C28 = IF(B28<0,0,B28) C41=IF(B41<0,0,B41)
F21 =E4*((E6*C21)+(E7*C22)) F34=E4*((E6*C34)+(E7*C35))
F22 =E4*((E6*C22)+(E7*C23)) F35=E4*((E6*C35)+(E7*C36))
F24 =E4*((E6*G21)+(E7*G22)) F37=E4*((E6*G34)+(E7*G35))
G21 =IF(F21<0,0,F21) G34=IF(F34<0,0,F34)
G22 =IF(F22<0,0,F22) G35=IF(F35<0,0,F35)

Table 35: Cell Formulas for Binomial Option Pricing Model