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Recent Developments and Applicability of the Black and Scholes Model in Option Pricing: A Literature Review

Vol 7 , Issue 2 , July - December 2020 | Pages: 158-183 | Review paper  

 
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https://doi.org/10.17492/jpi.mudra.v7i2.722034


Author Details ( * ) denotes Corresponding author

1. Parminder Bajaj, Professor, Management, Jagan Institute of Management Studies, Rohini, Delhi, India (parminderbajaj@jimsindia.org)
2. * Jasmeet Kaur, Research Scholar, Finance, Jagan Institute of Management Studies, New Delhi, Delhi, India (bhamrah.jasmeet23@gmail.com)

This paper examines the applicability of the Black and Scholes model by providing a critical review of the available literature on the topic, within the field of derivative pricing. The model developed by Black and Scholes has seen major advances and this paper investigates the relevance of the Black and Scholes model by comparing the results derived by other mathematical models. Most of the empirical studies reviewed are in the Indian context. Also, analytical and numerical breakthroughs are provided to overcome the limitations of the existing model. In this review paper, we have identified the relevant literature from 2008 to 2019 and some of the recent studies till April 2020 to provide useful insights to the academic community. A qualitative approach is followed using different keywords and search on different databases, to find the explicit range of scientific contributions for the analysis. The advances in the model over the years provide useful solutions to decision-makers to understand the different techniques of evaluating options as well as other financial instruments by providing solutions to linear and non-linear equations.

Keywords

Option pricing; Black and Scholes model; Option valuation; European option.

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