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Challenges with Using the Black-Scholes Model for Pricing Long-Maturity Options

This thesis investigates the application of the Black-Scholes model for pricing long-maturity options, primarily utilizing historical data on S\&P500 options. It compares prices computed with the Black-Scholes formula to actual market prices and critically examines the validity of the Black-Scholes model assumptions over long time frames. The assumptions mainly focused on are the constant volatility assumption, the assumption of normally distributed returns, the constant interest rate assumption and the no transaction cost assumption. The results show that the differences between computed prices and actual prices decrease as options get closer to maturity. They also show that several of the Black-Scholes model assumptions are not entirely realistic over long time frames. The conclusion of the thesis is that there are several limitations to the Black-Scholes model when it comes to pricing long-maturity options.

Identiferoai:union.ndltd.org:UPSALLA1/oai:DiVA.org:kth-349254
Date January 2024
CreatorsSigurd, Wilhelm, Eriksson, Jarl
PublisherKTH, Skolan för teknikvetenskap (SCI)
Source SetsDiVA Archive at Upsalla University
LanguageEnglish
Detected LanguageEnglish
TypeStudent thesis, info:eu-repo/semantics/bachelorThesis, text
Formatapplication/pdf
Rightsinfo:eu-repo/semantics/openAccess
RelationTRITA-SCI-GRU ; 2024:159

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