Analytical Solution of Black-Scholes Equation in Predicting Market Prices and Its Pricing Bias
Azor, Promise Andaowei *
Department of Bio Statistics, Bayelsa State College of Technology, Nigeria.
Amadi, Innocent Uchenna
Department of Mathematics/ Statistics, Captain Elechi Amadi Polytechnic, Rumuola, Rivers State, Nigeria.
*Author to whom correspondence should be addressed.
Abstract
This paper is geared towards implementation of Black-Scholes equation in valuation of European call option and predicting market prices for option traders. First, we explained how Black-Scholes equation can be used to estimate option prices and then we also estimated the BS pricing bias from where market prices were predicted. From the results, it was discovered that Black-Scholes values were relatively close to market prices but a little increase in strike prices (K) decreases the option prices. Furthermore, goodness of fit test was done using Kolmogorov –Sminorvov to study BSM and Market prices.
Keywords: Black- Scholes Model (BSM), call option, bias and market prices.