Dissertation

i
(ABSTRACT)
This study compares two different option pricing models (Black-Scholes model
and Bias-Adjusted Black-Scholes model). It is known that Black-Scholes pricing
errors are larger in the deeper out-of-the-money options relative to the near outof-the-money options, and mispricing worsens with increased volatility.
The
study examines equity options from thirteen different companies listed in

FTSE100 over period immediately after September 11, which was associated
with high volatility.
The study ascertains that both models equally mispriced in-the money and outof-the money and the suggested model (Bias-Adjusted Black-Scholes) model can
not be used instead of Black-Scholes model.
ii
(ACKNOWLEDGEMENTS)
First and foremost, I would like to thank Dr. Peter Casson for his encouragement
and support throughout the time this dissertation was prepared. His guidance
and comments helped me greatly in redeveloping the principles of this topic.
Equally important to this dissertation was invaluable help I receive from S.H
Searle, in her indispensable lessons on how to use DATASTREAM system.
1.1 Introduction...............................................................................................................................................3
1. Literature Review.......................................................................................................................................6
2. Data and Methodology.............................................................................................................................11
3.1.Black-Scholes model ...........................................................................................................................12
3.2.Bias-Adjusted Black-Scholes model ...................................................................................................13
3.3.Implied Volatility.................................................................................................................................14
I.Newton-Raphson................................................................................................................................14
II.Vega ..................................................................................................................................................15
3.4.Statistical Tests....................................................................................................................................17
3.4.1.Random Walk Test.......................................................................................................................17
3.4.2.Regression Analysis.....................................................................................................................20
3. Empirical Results......................................................................................................................................21
4. Summary and Conclusion .......................................................................................................................26
REFERENCES......................................................................................................................................28
APPENDIX..............................................................................................................................................I
1.1 Introduction
Ever since the seminal papers by Black and Scholes (1973) and Merton (1973), the
option pricing model has in deed been a dominant tool in the development of financial
system. This has been epitomized as the academic researchers have paid considerable
attention to bring forward a fair theoretical option pricing model. The Fischer Black and
Mylon Scholes (1973) formula is certainly the widely used model in computing the price
of the arbitrage free prices of equity options. The model merely entails these parameters;
price of the underlying asset and strike price and expiration date, the rate of interest and
the volatility of the underlying asset both assumed constant over the life of the option.
However, the subsequent empirical studies have shown that the Black-Scholes option
pricing formula is often reported to produce model values that vary in systematic ways from
market prices. An example might be the overpricing of out-of-the-money near-maturity
calls relative to at-the-money middle-maturity calls on the same underlying stock. When the
Black-Scholes formula is inverted, the implied volatilities estimates differ across exercise
prices and maturities, and form patterns called smile. This result is generally attributed
to the hypothesis of the distribution of the underlying asset given as geometric Brownian
motion which emphasis that the continuous rate of return is normally distributed with
constant volatility.
4
In order to avoid these biases, researchers have considered either of the two distinctive
approaches; to relaxed the assumptions in Black-Scholes model or completely apply an
alternative model. In every approach chosen, basic assumptions are made such as
distribution assumption, interest rate process or even the volatility estimation. For each
assumption made there are many possible choices to select and thus there could be
extremely huge number of option pricing models. Illustration from the most Salient
Epithets is an apparent indication of the pursuit of fair theoretical option pricing model.
For instance, stochastic process has been developed as an alternative to the geometric
Brownian motion. Merton (1976) chose a jump-diffusion process and more recently by
Bates (1991 and 1996-a) and Madan and Chang (1996) Rubinstein (1983) proposed
displaced diffusion model, whilst Hull and White (1987), Stein and Stein (1991) and
Heston (1993) consider stochastic volatility models. Bates (1996-b and 2000) and Pan
(2002) extend the jump-diffusion model to incorporate stochastic volatility to explain the
structure of option prices while Bakshi, Cao and Chen (1997), Bakshi (2000) develop
option pricing models that allowed a combination stochastic volatility, stochastic interest
rate and random jump. But the dominating observable fact in all these cases is the stock
volatility.
Ncube and Satchell (1995) considered the behaviour of option price as the maximum
variance changes and proposed a bias-adjusted Black-Scholes valuation model which
consists of standard Black-Scholes minus some correction terms. From the test results
they concluded that their model worked better than the Black-Scholes model in valuing in
and out-of-the money index call option. The principal idea here is to see how this model
really resolves known empirical biases associated with Black-Scholes model in pricing of
stock options. Ncube and Satchell (1995) simulated index data similar to FTSE100, but
having said this; the stock indexes and individual stocks would have different implied
distributions and volatility smiles since the index is an aggregate of the stocks. Basically
if this option pricing model works well to price options, then an investor can use the
observed option prices to invert the option pricing model to obtain the markets estimate
of the underlying assets volatility (implied volatility). It is quite imperative to explore
the robustness of the bias-adjusted Black-Scholes model in valuing the price of the equity
options relative to the standard Black-Scholes. The corresponding implied volatilities are
5
compared since the options implied volatility is of great importance to traders, whether
they are hedgers or speculators. But any investor aiming high is primarily interested in
future price change than just the intrinsic value, from such changes they can either
generate gains or losses.
In order to pursue these, the statistical hypothesis about how options are priced can be
conceived as a joint hypothesis to the effect that the option pricing formula is correct and
the markets are efficient. If the hypothesis is rejected, it implies that either the option
pricing formula is incorrect or the efficient market hypothesis is false, or both are false.
But an obvious prejudiced rationalization would be that the model is incorrect, a sceptical
conclusion, though. On the other hand we cannot clearly tell whether the market option
prices are correct since the time series of the evaluation periods are too short, and hence
does not reveal the true distribution of the underlying asset accurately and therefore it is
possible the market prices integrate the prospect of rare events that are not represented in
the sample period. Indeed, if rare events are more frequent than it is assumed in the
normal case, then the suggested model perhaps would price deep out-of-the-money
options better than the Black and Scholes (1973) model predicts. But considering the
option prices to be totally wrong may seem nave; on the contrary, believing all option
prices to always be correct is equally nave.
Therefore, it is inevitable to test the formulas under the following conditions; for the
underlying assets following the random walk and non-random walk. There are two
contradicting theories describing the behaviour of stock prices. One theory argues that
market movements are, to some extent predictable. Stock prices exhibits a familiar
pattern over a given period of time with the returns and volatility attributable to the
unsystematic (specific) risk, referring factors such as profit results or management
changes or company direction. And in such a case a volatility estimator that would not
bias the model can be obtained without many complications. On the contrary, theorist
argues that the stock prices are unpredictable given that the stock volatility and returns
are due to a combination of unsystematic and systematic (market risk). This creates an
uncertain environment but arguably conducive for options trading since the basic
objection of options is to transfer risk under uncertain environment.
6
Given this, the pursues thoroughly in testing the robustness of the suggested model
and aims to see if the model can be used as a substitute to the Black-Scholes model in
pricing of in-the-money (ITM) and out-of-the-money (OTM) call options through
answering questions such; are these models results the same? Which model is more
accurate? Does the correction term explain the pricing error in Black-Scholes model?
1.
Literature Review
While the benefits stemming from the financial functions performed by the option
market have been discussed and proven by academics, an increasing concern exists
within the financial community over the risk involved in options. The amount of
resources dedicated towards the option market, the unparallel relationship flanked by
markets and acquisition of advanced trading and information technology are among the
factors which accounts to this ambiguity. Evidence of this can be recalled from the
stock market crash of 1987, which led many market participants to believe that options
trading is a very risky activity that may conclusively lead to systemic failures in the
financial market. Since then a lot of attention has been focussed on various anomalies
that may lead to a financial disaster.
This is what necessitates the core function of the financial system, which is to
facilitate the allocation and development of economic resources, both spatially and
across time, in an uncertain environment, Merton (1990). The short-term financial
decision implies uncertainty and options are written on future payoffs that are by nature
uncertain. However, Risk is coherent characteristic of option trade. Numerous studies
reveal that financial innovation such as options counterbalance this risk surrounding an
underlying asset. To trade options is to trade risk and these transactions can be
perceived a zero-sum game in an instance whereby for every risk averse there is a risk
perverse. Whenever one buys a call option, there must be someone who writes the
instrument. The cost for holding option is equal the return for the writer of the option for
providing tractability. At maturity date, the buyer exercises the option and receives the
difference between the settlement price and the exercise price as a cash inflow
corresponding to his counterpart's cash outflow. Stock price help in targeting the amount
of uncertainty involved but lack of clarity interjects serious limitations in doing so.
7
Technically, the price of an option can be expressed in a simple function of easily
observable stock price(s). But in order to trade options effectively the market has to be
hypothetically efficient. Indeed this is another problem. In efficient market, future price
are assumed to be unpredictable and therefore our uncertainty as we look forward in the
price of the underlying asset is increased. It is quite obvious to state, but the realisation
that this price uncertainty is itself volatile has not only affected forecasting, but also
option valuation. It is in every researchers endeavour to integrate this uncertainty into
the pricing of an option but our judgement about future price movements is always flared
by the possibility of occurrence of rare events. Without an effective measure for these
uncertainties, then traders would incur losses and perhaps options would be redundant
assets. Little has been done to suggest how to calculate options under these conditions.
Academic researchers have paid considerable attention to bringing forward a fair
theoretical option-pricing formula. Since 1973, when Fischer Black and Mylon Scholes
developed the option pricing model, there has been abundant volatility specifications to
substitute the original, simple and constant volatility. Black-Scholes theoretical pricing
model provided a major' breakthrough in the field of finance by replacing the old models,
which were too complex and inaccurate. The idea of the original Black and Scholes
model was to evaluate the European option on non-dividend paying stock; the dividend
component was later introduced. Its original specification of geometric Brownian motion
for the underlying asset price has been and continues to be the dominant option pricing
model, against which all other models are measured. The dominance of the BlackScholes model is reflected in the fact that the implicit volatility - the value of that
equates the appropriate option pricing formula to the observed option price has become
the standard method of quoting option prices.
Most theoretical option pricing papers have maintained the geometric Brownian
motion assumption in some form, and have focussed upon the impact of dividends and/or
early exercise upon option valuation. While Black and Scholes (1973) assumed nondividend paying stocks, Merton (1973) allowed evaluation of European option prices to
stocks with constant continuous dividend yields, Black (1976) adjusted the model to
accommodate evaluation of options on futures contracts, which was called Black model.
Garman and Kohlhagen (1976) made several other modifications to Black-Scholes to
8
allow the evaluation of option on foreign currencies, a formula known as
Garman-Kohlhagen model. Mthuli Ncube and Stephen Satchell (1995) referred to Butler
and Schachter (1986) to develop a bias-adjusted Black-Scholes option-pricing model
using arguments based on Jensen's Inequality. Their model consisted of Black-Scholes
model minus correction term, derived from the second derivative of the standard BlackScholes model with respect to variance, 2. They argued that their model can be used to
calculate prices when option is either in-the-money or out-of-the-money.
Tests of the Black-Scholes model have, therefore, typically involved some recognition
that the model is misspecified and that its underlying distributional assumption of
constant-volatility geometric Brownian motion with probability one is false. Assorted
alternate estimators premised on geometric Brownian motion have been proposed for
deriving time series-based predictions of appropriate option prices conditional on the use
of a relatively short data interval. Boyle and Ananthanarayanan (1977) analysed the
impact of variance estimation on the pricing of options and suggested Bayesian methods
that exploit prior information regarding the variance. Butler and Schachter (1986)
expanded the Black-Scholes model into a Taylor series in 2 and estimated the powers by
appropriate unbiased estimators based upon the postulated normal distribution for logdifferenced asset prices. They realised that although sample variance is an unbiased
estimator of the true variance, failure to incorporate the possibility of variance related
biases in pricing option, biased option pricing model due to varying nonlinear
transformation. Consequently, they developed an unbiased option pricing model for
Black-Scholes option prices. However, in their subsequent epithet, Butler and Schachter
(1994), they concluded that the variance-induced bias by use of a small sample was
insignificant for standard tests of option market efficiency.
Hull and White (1987)
developed an option pricing model that is more flexible than the Black-Scholes model by
exploiting the second derivative of the option with respect to a variance of stock returns.
Ncube and Satchell (1997) examined the properties of the Black-Scholes price, through
exploiting monotonicity properties of the option price with respect to the asset price and
volatility, to obtain the conditional distribution of true Black-Scholes price and
conditional distribution of predicted Black-Scholes price respectively by assuming that 2
to be known and not estimated.
9
So far many papers have circle around the issue of volatility for some reasons. Yes
indeed it is well-known that the volatility of financial data series tends to change over
time, and changes in return volatility of stock returns tend to be persistent. Proponents of
this investigation have unearthed enormous evidence in contrast of the assumed statistical
properties of return volatility.
Such evidences have triggered profound interest in
financial economics to study and uncover an alternative to much criticised notion that the
log-returns of asset prices followed a stationary distribution, such as the Gaussian
distribution. If the stationary distribution is valid, then empirical tests of the consistency
of option prices with time series data would be relatively feasible and the process of
estimating historical volatility would easily be fathomable. For a continuous trading,
option pricing model requires a good estimate of this parameter, since wrong estimate of
volatility would bias the model and cause traders to incur losses, Levy and Yoder (1996).
As the underlying asset becomes more volatile, the expectation for a higher options
payoff is increased and the holder of the option may benefit from this. In case of a
volatile asset, the price of an option today is as well expected to be higher. In other
words, volatility is of much importance to the holder of an option at the maturity of the
option. Improper estimation could otherwise distort the holders/writers expectation of the
future payoff and hence leads to a greater loss.
If the Black-Scholes model is true, then estimation of parameters is the only possible
source of discrepancies from the market option prices. Besides, strike prices of the stock
option are measured perfectly, unless there is any copying error. The rest of the
parameters, however, are vulnerable to systematic errors. But a considerable care is
taken, given the fact that un-synchronized data may lead to significant but false
arbitrage opportunities which in essence violates the underlying Black-Scholes
paradigm since in essence, option prices are extremely sensitive to the underlying asset
price.
Even so, many studies have suggested that it is the volatility estimation that attributes
considerably to these inconsistencies. For example, Boyle and Ananthanarayanan (1977)
examined the extent of the bias caused by estimation of volatility on the pricing model by
calculating the average deviation of the sample Black-Scholes call price using a sample
estimate of volatility from the theoretical Black-Scholes call price using the true variance.
10
The results suggested that, the bias in the option price becomes insignificant when the
sample size from which the estimated variance is calculated is increased and the positive
and negative deviations from the actual call price have a counterbalancing result. Tim
Bollerslev, Ray Y. Chou and Kenneth F. Kroner (1992) refuted the assumption of a
constant volatility by confirming that volatility is by itself volatile over the period of the
options. These change have been modelled, some studies suggests that this changes may
follow stochastic or random processes.
This deficiency has been exposed in Macbeth and Merville (1979), who tried
Black-Scholes model by considering various call options on the same stock at the same
time and compared the implied volatilities from these options prices. They realised that
the implied volatilities for in-the-money were relatively higher than those of
out-of-the-money, and not only does the volatility vary with strike price but also with
time to maturity of an option. Intuitively, it follows the assumption that Black-Scholes
model tends to overprice out-of-the-money call options and underprice in-the-money call
options. This bias acts as if the implied volatilities were inversely related to the exercise
price and contrary to Blacks (1976) results. Macbeth and Merville (1979) proposed that
these results might be due to constant variance of the underlying distribution of asset
returns and these effect is more pronounced as the time to maturity increases and the
degree to which the option is in-the or out-of-the money increases.
Rubinstein (1985) reports that strike price bias is statistically significant, but the
direction of the bias changes from period to period. This view is consistent with notion
that the implied volatility smile is more prominent after the October 1987 stock market
crash than before and supported by Dumas, Fleming and Whaley (1998). In their study,
they reported that prior to the 1987 crash, volatilities were symmetric around zero
moneyness, with in-the-money and out-of-the-money having higher implied volatilities
than at-the-money options. However, after the crash, the call (put) option implied
volatilities were decreasing monotonically as the call (put) went deeper into out-of-themoney (in-the-money).
Earlier researchers have contrasted implied volatility and historical volatility. Canina
and Figlewski (1993) investigated ability of implied volatility to forecast actual volatility
through regressing realised volatility on historical volatility and again on implied
11
volatility. The found that historical volatility could explain some of the variation in
realised volatility (future volatility), but implied volatility could not ascertain. But
Mayhew (1995) referenced Marsh and Rosenfeld (1986) to contest the technique used to
calculate the historical volatility, which was to calculate standard deviation of returns,
based on time series of closing prices, since. He argued that these extreme-value
estimators are quite sensitive to properties such as infrequent trading, and bid-ask bounce
or vulnerable to selection bias. Mayhew (1995), however, concluded that implied
volatility predicts future realised volatility in isolation as well as in conjunction with the
historical volatility.
These reports have stimulated interest in alternative option pricing formulas. While
several assumptions underlying the Black-Scholes analysis can be questioned, emphasis has
focused on the properties of the stochastic process followed by the underlying stock. The
reports of biases from Black-Scholes values both from traders and from academic studies
are conflicting. After all, these mispricing by Black-Scholes model is not adequate to present
profitable arbitrage opportunities to investors. At this juncture, this study might seem
classical on the grounds that option pricing has moved a long way from the Black-Scholes
model. But the fact is, Black-Scholes model is still widely used in application, and at
present, no consensus exists and none of the other models clearly dominates others.
2.
Data and Methodology

The data consists of daily closing equity prices for thirteen companies listed in London
Stock Exchange FTSE100. The data also comprises of a set of call of option prices data
with maturity period in January, 2002. The study spans exactly eight years, starting from
January, 1994 and extending till December, 2002 and measure ratio and other statistics
for daily returns.
The span of the time period in sampling of the data was restricted due to the
availability of data. Data on some of the selected companies were only available only
from January, 1994. The data on companies equity is obtained from the London
International Financial Futures and Options Exchange (LIFFE) Market Feed. Non-trading
period is taken into consideration. Differences in the trading and non-trading variances
have important implications for option pricing. While the modification by French (1984)
12
model assumes that volatility is due to trading, it also can be caused by public and private
information as suggested by French and Roll (1986) and Jones, Kaul and Lipson (1994).
If this is the case, it should be taken into the account in option pricing. The daily closing
prices of respective equities are used as the source data. The return is calculated as the
logarithmic difference between two consecutive prices in a series, yielding continuously
compounded returns. The sample generates 2009 daily observations for each respective
company.
Daily closing prices of respective companies call options from LIFFE market are used
in the empirical analysis. The equity options are European type of options. These options
expire every third Wednesday of an expiration month. The sample covers the period from
October 1, 2001 to December 31, 2001. Two ranges of time-to-expiration were
distinguished; near maturity (16 to 40 days), and longer maturity (40 to 107 days). Options
with less than 16 days to expiration were omitted. The daily series of the over-night
LIBOR rate from the sample period were used to represent the risk-free interest rate
which is downloaded from the DATASTREAM.
3.1.
Black-Scholes model
The Black-Scholes option model tells us what the theoretical price of an option should
be. This model is characterised by assumption that stock prices follow what is termed a
random walk. This means that proportional changes in the stock price in short period of
time are normally distributed. Some of the assumptions made by Black and Scholes were;
Stock price follows a geometric Wiener process, which implies that the Stock price at any
future time has a lognormal distribution and if it is sampled at discrete times one will see
a geometric random walk with Gaussian steps. There are no dividends on the stock during
the life of the option. There are no transaction costs or taxes. All investors can, borrow or
lend at a constant, risk-free rate, r, (i.e. there are no riskless arbitrage opportunities). All
shares are infinitely divisible, and a continuous trading exists. Investors can borrow or
lend at, the same risk-free rate of interest. The Black and Scholes formula for the
European call option non-dividend-paying stocks is written a following:
C ( Pt , 2 ) = Pt ( d1 ) K exp( r )(d 2 )
(1)
13
where K is the exercise price, is the time to maturity, and r is the (fixed) known
riskless interest rate from t to t+. The term () is the standard normal distribution
function, and d1 and d2 are given by
d1 =
ln( Pt / K ) + (r +
2
)
2
(2)
and
d 2 = d1
(3)
.
2
2
The log-return is x j = ln( Pj / Pj 1 ) ~ i.i.d. N ( 12 , ), the classical estimator is
used to in estimating the historical volatility.
t2 =
1
t 1
(x
j =1
x)2
(4)
where
x = 1t j =1 x j
t
3.2.
(5)
Bias-Adjusted Black-Scholes model
Applying the argument based on Jensen's inequality to develop the bias-adjusted Black
and Scholes model, the model consists of the standard Black and Scholes minus some
correction terms. The correction terms depends on the second derivative of the option
price with respect to the volatility. Its sign is governed by whether the model is convex or
concave. Bias-Adjusted Black-Scholes model to calculate European call options
Ncube and Satchell (1995) considered the bias of the predicted Black-Scholes prices
as a predictor of the true option prices conditional on stock prices, consequently arguing
that all the variability is due to the volatility estimator, notably the classical estimator.
By considering the behaviour of the true option as the volatility is varied, they
differentiated the Black-Scholes model with respect to volatility, 2. From the second
derivative of Black-Scholes model they able to obtain the correction term whose value
14
basically depended on whether the option is in the money, at the money, or out of the
money. Their model is given a follows:
4(t 1)
C adj ( Pt , 2 ) = Pt ( d 1 ) K exp(r )( d 2 ) Pt (d 1 )(d 1 d 2 1)
where ' is a standard normal density function. Therefore, the bias-adjusted BlackScholes model is simply a standard Black-Scholes model with a correction term
dependent on the second derivative of the option with the respect to the variance of the
stock returns, is a fraction of Black-Scholes model Vega.
3.3.
Implied Volatility
For any option that has a quote, it is possible to determine the volatility from the
option's price. It's volatility implicit in the price, or in other words an implied volatility.
Implied volatilities are the precise numbers you need to look at to decide if an option is
overpriced or underpriced. The implied volatility is, in a sense, what the option market
trader's think the statistical volatility will be before the expiration of the option given as
the level of volatility in the Black-Scholes formula which equates the market price of an
option to its formula value.
I. Newton-Raphson1
Unfortunately, the Black-Scholes formula cannot be inverted analytically to solve for
implied volatility. Nonetheless, the formula can be quickly solved with numerical
techniques to obtain a good approximation. In particular, by implement a Newton1
The Newton-Raphson iterative method

The Newton-Raphson method is suitable for implementation on a computer; (using programming language
such as C). It is a process for the determination of a real root of an equation f (x) = 0, given just one point
close to the desired root. Procedure: Let x0 denote the known approximate value of the root of f(x) = 0 and
= x +h
0
h the difference between the true value and the approximate value, i.e,
, and by
implementing Taylor series approximation to function, the second degree terminated Taylor expansion
about x0 is;
f ( ) = f ( x 0 + h) = f ( x0 ) + hf ( x 0 ) +
h2
f ( )
2!
= x0 + h,0 < < 1 lies between and x0 , Ignoring the remainder term and writing
f ( x0 )
h=
f ( x0 ) + h
f ( x 0 ) = 0 , f ( x 0 ) + hf ( x 0 ) 0 . Whence
f ( x0 )
and, consequently,
where
x1 = x0
f ( x0 )
f ( xn )
x n +1 = x n
f ( x 0 ) , and for iterative process,
f ( x n ) .
(6)
15
Raphson method, which typically converges in about three guesses to a close
approximation of the true volatility. The formula is given as follows;
x n +1 = x n
f ( xn )
f ( x n )
(7)
Where f ( x n ) the option price at x n the approximated volatility, and f ( xn ) is

defined as the , Vega (U) of the respective option model.
This indeed is a trial and error method for finding the root of an equation. This
approach is often used to estimate the implied volatility of an option using the BlackScholes option equation. Start with a reasonable estimate of volatility and calculate the
theoretical option value. Then divide the difference between the theoretical value and the
actual option price by the derivative of the Black- Scholes equation with respect to
volatility (Vega), evaluated at the estimated value for volatility, and reduce the prior
estimate of volatility by this amount. Proceed in this iteration until the theoretical value
and the actual price are sufficiently close.
A key implication of the Black-Scholes formula is that all standard European options
on the same underlying asset with the same time-to-expiration should have the same
implied volatility. Indeed, this idea is so ingrained in practice that options are commonly
sold not by quoting price but by quoting implied volatility. It is this estimate that is
backed-out when implied volatility is calculated from observed market price of the
option. If the implied volatility estimates are close to the actual volatility that prevails,
then the options market is effectively using all the available information in pricing the
option; simply, informationally efficient, and it becomes a way of testing the validity of
the Black-Scholes formula for volatility smile.
II. Vega
Black-Scholes model is deduced from the assumption that the price evolution of an
underlying asset is modelled by geometric Brownian motion. The standard deviation of
this process is assumed to be constant.
In practice one observes that the volatility change in time, implying that the value of
an option contract is vulnerable to changes of movements in volatility as well as a result
16
of asset price fluctuation and time lapse. The rate of change of the value of the portfolio
with respect to the volatility of the underlying asset is known as Vega2, U.
The professional market uses the Greeks to measure exactly how much they need to
hedge their portfolio. The Greeks also enable the measurement of how much risk the
portfolio is exposed to, and where that risk lies. Vega is the amount your option will gain
with a percentage point rise in implied volatility. When Vega is positive, it is referred to
as being bullish on volatility; meaning that the expectation is that volatility will go
higher. When Vega is negative, a decline in volatility is an advantage. Therefore, Vega
high in absolute terms suggests that the portfolios value is affected by any small changes
in volatility. But when Vega is low in absolute terms, a small change in volatility has a
relatively small effect on the value of the portfolio. An option position that has all the
Greeks zero except for Vega would be a pure volatility trade, although it is difficult to
combine different options and obtain a pure volatility trade, but a trader can get close to
it.
To obtain Vega through Black-Scholes model might seem inconsistent with the
underlying assumptions of constant volatility, but even so, calculating Vega using
stochastic volatility model have no significant difference. Therefore, in this study, Vega
from Black-Scholes model and bias-adjusted Black-Scholes model are obtained.
For Black-Scholes model Vega is defined as follows,
Vbs = P0 t ( d 1 )
(8)
Where P0 is stock price, t is time to maturity and ' is a standard normal density function.
To obtain Vega for the bias-adjusted Black-Scholes model, the model was differentiated
with respect to volatility to obtain the following expression,
(d d 1)(4 d 2 ) 4(d12 + d 22 )
Vadj = P0 t (d1 ) 1 1 2
16(n 1)
(9)
where n is the number of days used in calculation of historical volatility. The above
equation can be rewritten in terms of Black-Scholes Vega as follows,
2
Vega (sometimes called kappa) is one of the Greek factor sensitivities used by traders to measure
exposures in derivatives portfolios. Portfolios that hold options either directly or imbedded in
instruments held by the portfolio are sensitive to the implied volatilities of the underliers. In general,
a long option position will benefit from rising implied volatilities and suffer from declining implied
volatilities. Short option positions display opposite behaviour.
17
( d d 1)(4 d 2 ) 4(d12 + d 22 )
Vadj = Vbs 1 1 2
16(n 1)
3.4.
(10)
Statistical Tests
In this study it has been assumed that the bias in the option pricing is dependant on
whether the prices are efficient or not. The test is carried in the following procedure; first
from the list of companies the underlying stock prices are tested for the random walk
using Dickey-Fuller argument to categorise these stock prices into two statistical groups.
Then for every member of a group, two option prices are calculated each from each
comparing model. Then the prices from each model are regressed against the true market
option prices.
3.4.1. Random Walk Test
A common starting point for many theories in economics and finance is that the stock
price movements have a random walk behaviour and obey a log-normal probability
distribution. This is a characteristic incorporated in Black-Scholes model derived through
empirical observation.
The conventional view of stock markets and their behaviour is that the price of a stock
reflects all the information available on that stock. In this model, any variations in price
would correspond to the arrival of new information. These new information arrives at
random and hence the price changes becomes random. According to Fama (1965), the
Random Walk Hypothesis states that, The future path of the price level of a security is
no more predictable than the path of a series of cumulated random numbers. In statistical
terms the hypothesis states that the successive price changes are independent, identically
distributed random variables so that price changes cannot be predicted from historical
price changes.
However, small discrepancies have been observed. For instance, if the Random-Walk
hypothesis were exactly true the events on October 19, 1987 should never have occurred.
Some of that information is predictable, and some isn't. The reason to such predictability
is typically either as a result of periods in which stock diverge from their fundamental
values because of changes in traders opinions or due to time varying returns. If the
18
market works effectively and efficiently, predictable information is already accounted for
in the price. In other words, a rise or fall has already taken place on the basis of
predictions. When the news finally arrives, it can no longer affect the price. Hence, price
fluctuations occur only in response to truly arrival of the new information which
contributes to the unpredictability based on available data. It makes sense, then, to model
fluctuations in stock prices as a log-normal geometric Gaussian random walk, which
proceeds in independent increments.
Of course, this does not imply that all stocks follow the same random walk. , Paul
Krugman (1999) argued that markets are neither perfectly efficient nor completely
inefficient and all markets are efficient to a certain degree but some markets are more
efficient than others. The future prospects of stocks may still differ. These future
prospects may create different random walk processes for different stocks and different
processes typically imply different probability distribution over prices. Investors are
assumed to have a preference relation over these probability distributions. A common
assumption about this preference relation is that investors are risk averse. For this case, it
is not a surprise as to why there are numerous option pricing formulas.
In this consideration, the study endeavours to dichotomise stock prices in prospect that
some follows a random walk and others do not. This is aimed at building clear contrast on
how the comparing models behave in particularly when the underlying assumption of the
price distribution is violated.
To appreciate this, Dickey-Fuller test for unit root is adopted to test the random walk
hypothesis. Dickey-Fuller statistic tests for the unit root in the time series data. Pt is
regressed against Pt 1 to test for unit root in a time series random walk model, which is
given as:
ln Pt = ln Pt 1 + t
where t is iidN (0, 2 ) .

If is significantly equal to 1, then the stochastic variable Pt is said to be having
unit root. A series with unit root is said to be nonstationary and does not follow a random
walk. There are three most popular Dickey-Fuller tests used for testing unit root in a
series.
The above equation can be rewritten as:
(11)
19
ln( Pt ) = ln( Pt 1 ) + t
(12)
Here = ( 1) and here it is tested if is equal to zero. Pt is a random walk if is

equal to zero. It is possible that the time series could behave as a random walk with a
drift. This means that the value of Pt value could also be added along with the constant
to the equation, which results in a null hypothesis reflecting stationary deviations from a
trend.
To test the validity of market efficiency, random walk hypothesis has been tested. In
order to test whether a series Pt is I(1), Dickey and Fuller advocate the following test
regressions
ln( Pt ) = ln( Pt 1 ) + t
(13)
ln( Pt ) = + ln( Pt 1 ) + t
(14)
ln( Pt ) = + ln( Pt 1 ) + .t + t
(15)
where,
is constant term and is the coefficient of trend term. The null hypothesis
for each is:

H0 :
=0
the null hypothesis that Pt is a random walk can be rejected if calculated

greater than the tabulated
. Calculation of
is
is similar to the estimation of t-statistic
but this value is compared with tabulated , whose critical values have been tabulated by
Dickey & Fuller on the basis of Monte Carlo simulations. The null hypothesis that Pt is a
random walk can be rejected if calculated
is greater than the tabulated .
The first model to be tested on the stationary series consists solely of an autoregressive
term with lag 1. The ARIMA procedure will then calculate a t-statistic which indicates
the level of confidence with which one can say that the selected term is, in fact, a valid
predictor. This process of identifying and selecting terms (autoregressive or moving
average) can be repeated multiple times until the model is appropriate.
20
3.4.2. Regression Analysis
The empirical tests at this point will be performed only on a reduced set of data. Total
number of companies was reduced to four, comprising of two companies whose equity
followed random walk. The null hypothesis is that option market prices and Black-Scholes
values exhibit no systematic differences. If the null hypothesis is rejected by the test, then
we must either conclude that; inputs have been incorrectly measured, or the options market
is inefficient, or Black-Scholes formula is incorrect.
But the trouble lies with the form of the Black-Scholes formula. It can be argued that the
first possibility is most likely given the bias of volatility estimator. Even though sample
estimator S k2 is unbiased, using it in place of 2 will bias model since ( S k ) . To try to
circumvent it, two set of volatility are applied. Certainly, there is also possibility that the
options market could also be sporadically inefficient during this period as a result of
September, 11, but it is argued that this predicament exhibits no systematic inefficiencies
over periods of several months. Therefore, by comparing observed biases with the predicted
biases of bias-adjusted Black-Scholes model, it may be possible to reject the Black-Scholes
formula in favour of bias-adjusted Black-Scholes model.
The following regression model can be used to test this notion;
yi = .xi + i
(16)
where y i , is true option price, x i is the calculated prices, correlation coefficient and
i is the error term.

Addition procedure is to calculate errors of Black-Scholes model by subtracting
Black-Scholes prices from market prices and then regress it against the correction term
suggested in bias-adjusted Black-Scholes model as follows;
cti = .ebsi + i
(17)
where cti is the correction term, ebsi is the error of Black-Scholes model from market
prices.
In this case, a null hypothesis 0 is stated in assumption that there is no difference in
parameters (mean, variance) between the errors in Black-Scholes model and the
suggested correction term.. And therefore, any observed difference in samples is due to
21
chance or sampling error. Here the hypothesis of interest is, 0 : = 0. and clearly we
would reject 0 in favour of 1 at 0.05 significance level.
3.
Empirical Results
Each of the price series is first examined for I (1), which is carried out in three steps
using an augmented Dickey-Fuller regression with one lag, to test whether or not the
respective equity prices, have unit roots at the five percent level of significance. In this
case the tests are conducted:
a. constant, (zero mean),
b. with a constant term but without trend term (single mean),
c. with a constant term and with trend term (trend).
The study conduct the unit root tests using the ADF method as implemented in SAS
(the %DFTEST macro and AUTOREG procedure). Table 1 displays calculated values of
the ADF unit root tests. Examination of ADF process fails to reject the null hypothesis of
a unit root for zero mean tests on all equities. The tests for single mean, however, reject
the null hypothesis for BAA at 5% level and six continents and Blue Circle at 15%, but
fail to reject for the Abbey, BA, BT, HSBC, Prudential, Safeway, Lloyds, CNGU and
Lonmin stock prices in all significance levels. But further test when incorporating the
trend term reveals a significance tests for CNGU and Blue Circle at 5% level and BAA
and Barclay at 10%, but Abbey, BA, BT, HSBC, Prudential, Safeway, Lloyds, CNGU
and Lonmin, however, failed in all tests suggesting that the these companies stock prices
are integrated of order one, I(1). First-differences of the log level of the respective stock
prices are stationary. The unit root results thus provide support for the random walk
hypothesis for all those companies equities. BAA, Blue Circle and CGNU however,
failed to rejects the null hypothesis of a unit root at the 5% level of significance level
suggesting their respective price series is not stationary and therefore do not follow a
random walk. Barclay, however, is close and the test rejects the null hypothesis at 10%
level.
For the subsequent analysis, some companies have been dropped on the basis of
above results. The remaining are; BAA and CNGU representing non-random walk, and
HSBC and LONMIN representing Random walk.
22
Table 2 displays two historical volatilities for each of the above companies. The two sets
of volatility with one calculated from a sample size 120 day and the other 150 days
closest to the period, are then compare with the implied volatility. This is indicated in
figure 1 to figure 4 in the appendix. The graphs relate the implied volatility from each
model and historical volatility (constant volatility) against maturity time. Starting with
BAA; from Figure 1 trend is characterised by probably major jumps in stock prices that
are infrequent therefore, there is no pattern evident. But it is possible to notice the
difference in volatility across the strike prices along the maturity period. For a longer
maturity period, the both models indicate a higher volatility for the in-the money that outof-the money. But as the trend drifts into the mid-maturity period both model suddenly
indicates higher implied volatility for out-of-the money options. This continues up to the
lower maturity period where the implied volatilities seem to be merging. Bias-Adjusted
Black-Scholes model reveals higher implied volatility than Black-Scholes model. This
figure also clearly shows that the first historical volatility is in many occasions above the
implied volatility while the second historical volatility for BAA seems to be more related
to the implied volatility than the first one.
Looking at CNGU, figure 2 this time is clearer. There is strong indication of smile
effect from both models. At a longer maturity the implied volatility seem to increase but
then begins to decay as it moves to toward the maturity period. By increasing the in-the
money strike price from 750 to 800 the implied volatility reduces marginally and this is
the same for out-of-the money when the strike price is increased from 950 to 1000 but the
difference is quite small. Both in-the money and out-of-the money seem to converge as
the maturity becomes closer. Both the historical volatilities are underestimated but closer
to the maturity both seem to correlate with implied volatility.
HSBC graph is shown on figure 3. The difference is quite distinctive across the strike
prices and maturity time. As the strike price is increased the implied volatility reduces for
both models when the maturity is longer. However, out-of-the money trend decays as the
maturity period reduces. Once again Bias-Adjusted Black-Scholes indicates a higher
volatility that Black-Scholes model at all times. Whereas the first historical volatility
dissects in-the money and the out-of-the money, the second historical volatility is above
the implied volatility.
23
LNR figure 4 similarly indicates the same pattern as HSBC, since when strike price is
increased from 700 to 750 the implied volatility simultaneously reduces. This also
happens for out-of-the money when the strike price is increased from 1100 to 1150, but at
this point the change in volatility is so small such that the trends seem to merge. From
longer maturity and mid-maturity both models seem to smile but as the time drifts toward
maturity both in-the money and out-of-the money implied volatility trends seem to
merge. Bias-Adjusted Black-Scholes model again indicate higher implied volatility for
both in-the money and out-of-the money options. The first historical volatility in this case
is far is quite close to the out-of-the money implied volatility but the second volatility is
away below all the implied volatilities.
From the above results, the historical volatility does not predict the implied volatility
correctly as a consequence this could attribute to bias in the pricing model. As option
prices are positively related to volatility, overestimating volatility causes the models to
produce fair values that are too high. The estimated volatilities, shown on table 2, are
indeed very high discrepancies but this does not necessarily mean that they are wrong.
Since September, 11 it has been very volatile for most companies and in particularly so
for airline operators such as BAA (APT) and insurance industry. Thus there are two
possible explanations, both related to volatility, for obtaining fair values that are too high
(low). Either the volatility estimates used in the calculations are high (low) or the market
wrongly estimated the true volatility of the shares.
Implied volatility estimates are
imprecise when large changes in volatility produce small change in option prices,
because, conversely, small errors in option prices or other option characteristics produce
large errors in implied volatility due to nonlinearity transformation, and therefore, no
conclusion can be made from the above results alone.
Nonetheless, precision of the models is not just dependent on volatility but it is also
upon whether the option valued is in-the money, at-the money or out-of-the-money and
whether there is a relation between prediction accuracy and time to expiry. This is done
by studying graphs that relate the difference between calculated prices and market prices
for different exercise prices along maturity time.
24
An overview of these is seen in figures 5 to 12, which shows option prices calculated
from each model for the respective companies. This is used in conjunction with table 4(a)
to 4(h). BAA results are shown in figure 5 and 6, which indicates both models overprice
both in-the money and out-of-the money. Black-Scholes results are better than biasadjusted Black-Scholes in both in-the money and deep in-the money for call options with
a longer maturity period, but as we draw closer to expiry period Bias-Adjusted BlackScholes model emerges the better in pricing both class of options. Looking at the out-ofthe money options, there is clear indication that Black-Scholes prices are better than biasadjusted Black-Scholes even when option is close to the maturity. However, dropping
deep out-of-the money, bias-adjusted Black-Scholes out performs Black-Scholes model
only when the maturity is close to expire. By varying historical volatility from %35 to
32%, both models still over prices the options but this time there is no distinctive pattern
although Bias-Adjusted Black-Scholes outperforms Black-Scholes model in most of the
prices, especially for deep out-of-the money and also when the options are close to the
maturity.
CUA results are indicated on figure 7 and 8 which shows that both models underprice
the call options with longer maturity period but as the expiry period decreases both
models overprice both in-the money and out-of-the money options, and there is a clear
indication that the bias-adjusted Black-Scholes outperforms Black-Scholes in both in-the
money and out-of-the money options. Similar pattern is observed even when the volatility
is varied from 38% to 40%.
In figure 9 and 10, HSB result shows that both models underprice in-the-money and
overprice out-of-the money options. A closer look at the results also indicates that BlackScholes model performs better in pricing deep in-the-money and slightly out-of-the
money option, where else bias-adjusted Black-Scholes performs better in pricing of
slightly
in-the-money and deep out-of-the money options for longer maturity. But
trending towards the maturity, Black-Scholes model clearly dominates in all instances
except when the option is deep out-of-the money. Changing historical volatility from
34% to 40% the pattern slightly changes, and in this case, both models overprice both inthe-money and out-of-the money. Black-Scholes results for in-the-money and out-of-the
money options are better than those of bias-adjusted Black-Scholes when the maturity is
25
longer but as the time draws closer to maturity, it is outperformed by bias-adjusted BlackScholes except when the option is slightly out-of-the money. What can be concluded,
however, is that again the predictions appear to be less accurate the closer to expiry the
option is.
For LNR results are shown on figure 11 and 12, both models underprice both in-the
money and out-of-the money with bias-adjusted Black-Scholes performing better in
pricing of in-the-money options and Black-Scholes model in out-of-the money options
when the maturity is longer. But moving toward the maturity, Black-Scholes performs
better except for slightly out-of-the money when historical volatility is 39%. Changing
the historical volatility to 35%, both models still underprices both in-the-money and outof-the money options. The pattern is slightly changed and again the Black-Scholes
performs better than bias-adjusted Black-Scholes model clearly dominates in both longer
and near the maturity with bias-adjusted Black-Scholes performing better only when the
option are slightly in-the money and slightly out-of-the money in longer and near
maturity respectively.
This result reveals that both models performance may depend upon which underlying
the share the option is written on and time to maturity. To determine whether the former
is the case, regression test was carried out for each option individually. The results in
table 3, indicates that both model are significant in predicting the true option prices. The
square of the multiple correlation coefficient is seen to be above 0.90 for all test. This
gives the proportion of variance in market option prices explained by both model. From
the analysis of the variance both regression and residual or sum of square show the Fstatistic in this case is highly significant confirming the strong relationship between
market prices and the options calculated by both model. This is also reflected in the
estimated regression coefficient for the variable and the t-statistic of whether the
population value of the coefficient is zero. In all instances, the p-values are 0.0001 highly
significant.
This leads to a acceptance of H0 and the conclusion that these two model can be used
to calculate fair prices and these prices are close to market prices and hence that the
models are good estimators. However, comparison of the calculated prices with the
market prices throughout the sample seems to suggest that the way these two models
26
values option may depend upon the strike price. Both models seem to price more
accurately for in-the-money options for companies which follows random walk and outof-the money for non-random walk shares. Specifically, it appears as though the biasadjusted Black-Scholes model is slightly accurate for the non-random walk companies
but not with a convincing margin. This is indicated by R-square results shown on the
table 3. The same results are observed even after using the second set of historical
volatility.
Based on the above results, further test on the correction is unnecessary given the fact
that, both model prices call options for these companies almost the same. In fact, the
regression results are questionable on the ground that this period was characterised with
significant jumps which perhaps existed as outliers and hence probably distorted this
statistics.
Judging from the statistical output provided previously the following can be state about
the suggested bias-adjusted Black-Scholes and Black-Scholes option pricing model:
It predicts prices for the BAA and CNGU options slightly fairer than for HSBC and
LANMIN where Black-Scholes does better. Both models however provide very similar
predictions. It should, however, be noted that, as indicated by the R2 and t-statistics, the
difference between the model is insignificant and the evidence cited here, does not
quantify in support of the model consistently outperforming Black-Scholes model as
suggested by Ncube and Satchell (1995). The evidence however, support that there is no
clear trend between the accuracy of the models and the difference between prices and
share prices, and hence there is no clear trend between the accuracy of the models and the
time to expiry of the options. Some of the results were due to the infrequent price jumps
during that period of the study.
4.
Summary and Conclusion
A number of problems came up during this excavation, one of which is associated with
the collection of data, study which made it difficult for the estimation of parameters; a
27
similar problem faced by most empirical work designed to test the alternatives. Inherent
factors in the implementation of such tests fail significantly since none provides a coherent
procedure independent of the parameter estimation. Such deficiencies interject serious
limitation even in trading despite of the theoretical advancement. We still lack a general
consensus clearly dominates.
Severe limitations were created by use of closing option and stock prices, and limited
samples of calendar time or underlying stocks. During this particular period it was difficult
to estimate the parameter as a result of September 11 the effect that reverberated across
financial markets. Calculating historical volatility for that period proved even more difficult
than expected. However, the volatility was finally achieved but obtaining options that
spanned over the period under investigation was not easily available.
Given this facts, the results outlined in this paper suggested that the two pricing models
were good at predicting market prices for all companies, and no model clearly dominated
the other by a significant margin. The model variation was due to the complexity of
volatility estimation. This was evidently determined by virtually employing implied
volatility; and the results were strongly in support of incorrect volatility estimates which
intern verified that inaccuracy of predicting models was not the case.
Although the study is designed to give the benefit of every doubt to the Black-Scholes
formula the suggested model is also slated with similar limitation a Black-Scholes model.
Perhaps the model should be refined to perform in disjoint of major deficiencies in BlackScholes model through incorporating non-stationary volatility. The correction term
introduce in this model is rather ambiguous. It is quite dependant on the sample period of
volatility calculation and in adversely affecting the pricing in the model since the length of
the historical volatility sample is factor in the term. The correction term may prevail in some
generalised instances but the economic significance is arguable.
28
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33
APPENDIX I
APPENDIX
Random Walk Test
Augmented Dickey-Fuller Unit Root Test at Lag 1
Abbey
Baa
Zero mean
Pr<
0.64
0.8541
-0.73 0.3999
Single mean
Pr<
-1.47 0.5490
-3.33 0.0141*
BA
Barclays
-0.77
1.18
0.3826
0.9398
-1.06
-1.11
0.7325
0.7128
Six
Continents
Blue Circle
0.17
0.7365
-2.44
0.35
0.7848
-2.38
BT
CGNU
HSBC
Prudential
Safeway
Lloyds/TSB
Lonmin
-0.35
0.21
-0.22
-0.32
0.05
0.93
1.05
0.5595
0.7481
0.6084
0.5702
0.6984
0.9179
0.9233
-1.21
-1.96
-1.93
-2.33
-2.21
-1.43
-0.69
0.1314**
*
0.1489**
*
0.6723
0.3024
0.3199
0.1632
0.2022
0.5700
0.8473
Company
Trend
Pr<
-2.00 0.6001
-3.23 0.0788*
*
-1.72 0.7425
-3.21 0.0829*
*
-2.34 0.4125
-3.87
0.0136*
-0.82
-3.43
-1.90
-2.30
-2.22
-1.77
-2.26
0.9625
0.0485*
0.6557
0.4325
0.4787
0.7201
0.4546
Notes:
Without trend is the Augmented Dickey-Fuller regressions include an intercept but
not a trend .With trend is the Augmented Dickey-Fuller regressions include an
intercept and a linear trend .Critical values are at the 95% significant level and given
by the SAS software * indicates significance at the 5% level, ** indicates significance
at the 10% level and *** indicates significance at the 15% level.
TABLE 1:
Historical volatility (%)
BAA
CNGU
HSBC
LONMI
N
Set
1
35
38
34
39
Set
2
32
40
40
35
Note: Volatility set 1and set 2 is calculated using sample size

120 and 150 respectively
APPENDIX II
TABLE 2:
Results For Regressions Of Predicting Models And
Market Prices (Proportion Of Variance Of The
Predicting Models From The Market True Option Prices,
R2).
(A)
For Option in The First Set of Volatilities

Black-Scholes
Deep
Deep
ITM
ITM
OTM
OTM
99.96
99.9 99.07 98.68
0
99.94
99.9 99.59 99.57
0
99.98
99.9 98.08 93.50
7
*
99.99
99.9 98.86 98.52*
8
*
bias-adjusted Black-Scholes
Deep
Deep
ITM
ITM
OTM
OTM
99.96
99.8 99.07 98.70*
9
99.94
99.9 99.57 99.47*
0
*
99.98
99.9 98.07 93.50
7
99.99
99.9 98.85 98.49
8
(B) For Option in The Second Set of Volatilities

Black-Scholes
bias-adjusted Black-Scholes
Deep
Deep
Deep
Deep
ITM
ITM
OTM
OTM
ITM
ITM
OTM
OTM
99.98
99.9 99.41 98.98
99.98
99.9 99.41 98.99*
5
5
99.95
99.9 99.45 99.32
99.95
99.9 99.47 99.33*
0
0
*
99.99
99.9 97.76 94.71*
99.96
99.9 97.76 94.70
6
6
99.96
99.9 97.53 97.02*
99.96
99.9 97.46 96.88
0
*
0
Note:
a. Option value using the historical volatility calculated from a sample size of 120
closest stock returns.
b. Option value using the historical volatility calculated from a sample size of 120
closest stock returns.
Figure 1 to Figure 4 below: shows the time series of Implied Volatilities for
each company from October, 1, 2001 to December, 31, 2001.The implied
volatility is extracted using daily closing option data. The implied volatility is
estimated using in-the money and out-of-the money call option contracts
APPENDIX III
Notes: iv1and iv2 are in the money implied volatilities and iv3 and iv4 are
out-of-the money implied volatilities calculated from Black-Scholes model.
aiv1and aiv2 are in the money implied volatilities and aiv3 and aiv4 are out-ofthe money implied volatilities calculated from Bias-Adjusted Black-Scholes
model. h-vo_1 and h-vol_2 are historical volatility calculated from sample size
120 and 150 days respectively.
Figure 1:
Time Series of Implied Volatility
BAA
0.4000
0.3800
0.3600
iv1
iv2
0.3400
iv3
iv4
0.3200
aiv1
aiv2
aiv3
0.3000
aiv4
h-vol_1
0.2800
h-vol_2
0.2600
0.2400
Figure 2:
20
26
28
30
34
36
40
42
44
48
50
54
56
58
62
64
68
70
72
76
78
82
84
86
90
92
96
98
ex
pi
ry
10
6
10
4
10
0
0.2200
APPENDIX IV
CNGU
0.5000
0.4800
0.4600
iv1
0.4400
iv2
iv3
iv4
0.4200
aiv1
aiv2
0.4000
aiv3
aiv4
h-vol_1
0.3800
h-vol_2
0.3600
0.3400
20
26
28
30
34
36
40
42
44
48
50
54
56
58
62
64
68
70
72
76
78
82
84
86
90
92
96
98
ex
pi
ry
10
6
10
4
10
0
0.3200
Figure 3:
HSBC
0.4100
iv1
iv2
0.3600
iv3
iv4
aiv1
aiv2
aiv3
0.3100
aiv4
h-vol_1
h-vol_2
0.2600
Figure 4:
20
26
28
30
34
36
40
42
44
48
50
54
56
58
62
64
68
70
72
76
78
82
84
86
90
92
96
98
ex
pi
ry
10
6
10
4
10
0
0.2100
APPENDIX V
LONMIN
0.5250
0.5050
0.4850
0.4650
iv1
iv2
iv3
0.4450
iv4
aiv1
0.4250
aiv2
aiv3
aiv4
0.4050
h-vol_1
h-vol_2
0.3850
0.3650
20
26
28
30
34
36
40
42
44
48
50
54
56
58
62
64
68
70
72
76
78
82
84
86
90
92
96
98
ex
pi
ry
10
6
10
4
10
0
0.3450
Figure 5:
BAA Pricing errors (Historical Volatility = 0.35)
8.00
6.00
4.00
BS1
BS2
BS3
2.00
BS4
ABS1
ABS2
ABS3
ABS4
0.00
-2.00
-4.00
Figure 6:
APPENDIX VI
BAA Pricing Errors (Historical Volatility = 0.32)
6.00
4.00
2.00
BS1
BS2
BS3
0.00
BS4
ABS1
ABS2
ABS3
ABS4
-2.00
-4.00
-6.00
Notes:
BS1 and BS2 are deep in-the money and in-the money and BS3 and BS4 are out-ofthe money and deep out-of-the money time series pricing errors from Black-Scholes
model. ABS1 and ABS2 are deep in-the money and in-the money and ABS3 and
ABS4 are out-of-the money and deep out-of-the money time series pricing errors
from Bias-Adjusted Black-Scholes model
Figure 7:
CNGU Pricing Errors (Historical Volatility = 038)
4.00
2.00
0.00
-2.00
-4.00
BS1
BS2
-6.00
BS3
BS4
ABS1
-8.00
ABS2
ABS3
ABS4
-10.00
-12.00
-14.00
-16.00
APPENDIX VII
Figure 8:
CNGU Pricing Errors (Historical Volatility = 0.40
6.00
4.00
2.00
0.00
BS1
BS2
-2.00
BS3
BS4
-4.00
ABS1
ABS2
ABS3
-6.00
ABS4
-8.00
-10.00
-12.00
-14.00
Notes:
Figure 9:
APPENDIX VIII
HSBC Pricing error in Models (Historical Volatility = 0.34)
20.00
15.00
BS1
BS2
10.00
BS3
BS4
ABS1
ABS2
ABS3
5.00
ABS4
0.00
-5.00
Figure 10:
HSBC Pricing Errors (Historical Volatility = 0.40)
12.00
10.00
8.00
6.00
BS1
BS2
4.00
BS3
BS4
2.00
ABS1
ABS2
ABS3
0.00
ABS4
-2.00
-4.00
-6.00
-8.00
Notes:
APPENDIX IX
Figure 11:
LONMIN Pricing Errors (Historical Volatility = 0.39)
4.00
2.00
0.00
BS1
BS2
BS3
BS4
-2.00
ABS1
ABS2
ABS3
ABS4
-4.00
-6.00
-8.00
Figure 12:
LONMIN Pricing Errors (Historical Volatility = 0.35)
2.00
0.00
-2.00
-4.00
bsmerror1
BS2
BS3
BS4
-6.00
ABS1
ABS2
ABS3
-8.00
ABS4
-10.00
-12.00
-14.00
Notes:
APPENDIX X
from Bias-Adjusted Black-Scholes model.
APPENDIX I
TABLE 4(A)
BAA Option Prices Calculated Using Historical Volatility ( =0.35)
Deep ITM (460)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
83
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
ITM (500)
Bsm2
absm2
True2
OTM (600)
Deep OTM(650)
Bsm1
absm1
True1
Bsm3 absm3 True3 Bsm4 absm4 True4
75.95
62.98
66.51
71.19
74.83
76.31
69.67
86.57
97.23
105.05
101.65
101.32
116.01
111.21
107.69
116.07
118.93
125.04
122.42
113.09
106.33
104.47
98.17
112.10
116.60
119.95
118.83
115.88
126.10
136.28
109.48
119.71
123.37
116.60
121.93
138.90
124.89
126.52
129.29
133.55
75.98
63.03
66.56
71.22
74.86
76.34
69.71
86.59
97.23
105.05
101.64
101.31
115.99
111.19
107.68
116.05
118.91
125.01
122.39
113.07
106.31
104.45
98.16
112.08
116.58
119.93
118.80
115.86
126.07
136.25
109.45
119.68
123.34
116.58
121.90
138.87
124.87
126.49
129.27
133.52
69.50 50.71 50.78 43.50 14.42 14.45 9.00 6.85 6.84 4.50
57.00 40.36 40.44 33.50 10.24 10.25 6.00 4.58 4.56 3.50
60.50 43.06 43.14 36.50 11.19 11.21 7.00 5.07 5.04 3.00
65.50 46.68 46.76 40.00 12.53 12.55 8.00 5.76 5.74 3.50
68.50 49.53 49.60 42.50 13.60 13.63 8.50 6.31 6.30 4.00
71.50 50.52 50.59 45.50 13.77 13.80 10.50 6.34 6.32 5.50
66.00 45.13 45.20 41.00 11.54 11.56 8.50 5.13 5.11 4.00
82.50 58.77 58.83 54.00 17.08 17.13 14.00 8.10 8.10 7.00
93.00 67.67 67.72 64.50 21.08 21.14 17.00 10.36 10.37 9.00
100.50 74.33 74.37 69.00 24.24 24.30 20.00 12.18 12.20 10.50
100.00 71.17 71.22 69.50 22.32 22.38 20.50 10.94 10.95 10.00
100.00 70.79 70.83 70.00 21.99 22.06 20.50 10.71 10.72 9.50
114.00 83.53 83.55 81.50 28.32 28.40 27.00 14.43 14.46 13.50
109.50 79.22 79.24 77.50 25.93 26.00 25.00 12.94 12.96 12.00
106.50 76.07 76.10 75.00 24.21 24.28 23.00 11.88 11.90 12.00
114.00 83.22 83.24 81.50 27.47 27.55 26.00 13.68 13.71 13.00
116.00 85.73 85.74 83.50 28.69 28.76 26.50 14.37 14.40 13.00
122.50 91.10 91.10 89.50 31.42 31.50 29.00 15.98 16.02 14.50
120.00 88.65 88.67 87.00 29.92 30.00 28.00 15.00 15.04 14.00
111.00 80.27 80.29 78.00 25.37 25.43 21.50 12.24 12.26 9.50
104.00 74.10 74.13 71.50 21.91 21.97 18.00 10.12 10.14 7.50
102.50 72.38 72.41 70.50 20.94 21.00 17.00 9.54 9.55 7.00
96.50 66.85 66.88 65.50 18.27 18.32 14.50 8.05 8.05 6.00
109.50 78.89 78.90 76.50 23.77 23.84 20.00 11.03 11.04 8.00
114.00 82.80 82.82 80.50 25.58 25.65 22.00 12.00 12.03 9.50
115.50 85.55 85.56 81.50 26.50 26.57 23.00 12.36 12.39 10.00
114.50 84.46 84.46 80.50 25.76 25.83 22.50 11.89 11.91 9.50
116.50 81.73 81.74 82.50 24.22 24.28 23.50 10.96 10.98 10.00
126.50 90.86 90.86 91.00 28.76 28.83 27.00 13.48 13.52 12.50
136.50 100.12 100.11 100.00 33.69 33.77 31.00 16.33 16.37 14.00
111.50 75.58 75.59 78.50 20.41 20.47 23.00 8.64 8.65 10.00
120.50 84.63 84.63 85.50 24.60 24.66 23.50 10.82 10.84 10.00
124.00 87.86 87.86 88.50 26.05 26.11 25.00 11.56 11.58 11.00
117.00 81.65 81.65 82.50 22.75 22.81 22.00 9.71 9.72 9.00
122.00 86.41 86.41 86.00 24.95 25.01 23.50 10.83 10.85 10.00
139.00 101.83 101.81 102.00 32.63 32.70 31.50 14.91 14.95 13.50
125.50 88.74 88.73 90.00 25.30 25.36 25.50 10.74 10.76 11.00
127.50 90.13 90.12 91.50 25.79 25.85 26.00 10.93 10.95 11.50
130.00 92.60 92.59 94.00 26.85 26.92 27.00 11.43 11.45 12.00
134.00 96.47 96.45 97.50 28.69 28.76 28.00 12.35 12.38 12.00
APPENDIX II
51
50
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
137.24
129.79
128.25
132.61
133.22
125.16
122.92
126.42
125.82
120.46
116.76
107.37
101.06
98.17
96.62
99.24
97.17
92.85
87.43
98.05
93.80
105.94
105.23
91.64
137.22
129.77
128.22
132.58
133.20
125.14
122.90
126.40
125.80
120.44
116.74
107.35
101.04
98.15
96.60
99.22
97.15
92.84
87.41
98.03
93.78
105.93
105.22
91.63
138.00
130.50
129.00
133.00
133.50
125.00
123.00
126.00
125.50
120.50
117.00
107.50
101.00
97.50
96.00
99.00
97.00
92.00
86.50
97.50
93.00
105.50
105.00
91.50
99.69
92.63
91.11
95.09
95.60
87.82
85.64
88.81
88.16
83.04
79.28
70.55
64.75
62.04
60.52
62.42
60.41
56.43
51.51
60.76
56.43
67.21
66.40
53.24
99.67 100.50 29.75 29.82 29.50 12.67

92.62 93.50 25.71 25.78 25.00 10.42
91.09 92.00 24.69 24.75 23.00 9.81
95.08 96.00 26.51 26.57 26.00 10.67
95.59 95.50 26.54 26.60 24.00 10.60
87.81 87.00 21.84 21.90 19.00 8.00
85.62 85.50 20.53 20.58 18.50 7.30
88.79 88.00 21.79 21.85 19.50 7.81
88.14 87.50 21.20 21.26 19.00 7.45
83.02 83.00 18.53 18.58 16.50 6.17
79.27 78.50 16.09 16.13 13.00 4.92
70.55 70.00 12.39 12.43 9.50 3.43
64.74 63.50 10.14 10.16 7.50 2.59
62.04 61.00 9.05 9.07 6.50 2.19
60.52 59.50 8.37 8.39 6.00 1.93
62.41 61.50 8.22 8.24 6.00 1.76
60.40 59.00 7.41 7.42 4.50 1.49
56.43 54.50 6.14 6.15 3.50 1.13
51.51 49.50 4.79 4.80 2.50 0.79
60.75 59.00 6.76 6.77 4.00 1.21
56.43 55.00 4.96 4.97 2.50 0.71
67.19 66.00 6.71 6.72 4.00 0.94
66.39 65.50 6.16 6.17 3.50 0.79
53.23 52.50 2.65 2.64 1.00 0.19
12.70 12.50
10.45 10.00
9.83 9.00
10.69 10.50
10.62 9.00
8.01 6.00
7.31 5.50
7.82 6.00
7.46 5.50
6.17 5.00
4.91 3.00
3.42 2.00
2.57 1.50
2.17 1.00
1.91 1.00
1.74 1.00
1.47 0.50
1.11 0.50
0.77 0.00
1.19 0.50
0.69 0.00
0.92 0.50
0.77 0.00
0.18 0.00
TABLE 4(B)
BAA Option Prices Calculated Using Historical Volatility (=0.32) .
Deep ITM (460)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
ITM (500)
Bsm1
absm1
True1
Bsm2
73.54
60.33
63.95
68.73
72.46
74.03
67.28
84.55
95.46
103.47
100.06
99.73
114.73
109.86
106.30
114.89
117.83
73.56
60.36
63.98
68.75
72.48
74.05
67.30
84.56
95.45
103.46
100.05
99.72
114.71
109.84
106.28
114.87
117.81
69.50
57.00
60.50
65.50
68.50
71.50
66.00
82.50
93.00
100.50
100.00
100.00
114.00
109.50
106.50
114.00
116.00
47.57
37.19
39.91
43.55
46.44
47.49
42.07
55.87
64.95
71.77
68.61
68.23
81.26
76.88
73.69
81.07
83.66
absm2
47.62
37.25
39.96
43.61
46.49
47.54
42.12
55.91
64.99
71.79
68.64
68.26
81.27
76.89
73.71
81.07
83.67
OTM (600)
True2
43.50
33.50
36.50
40.00
42.50
45.50
41.00
54.00
64.50
69.00
69.50
70.00
81.50
77.50
75.00
81.50
83.50
Deep OTM (650)

11.74
8.00
8.85
10.04
11.02
11.18
9.18
14.24
17.99
21.01
19.21
18.91
25.00
22.69
21.05
24.24
25.44
11.75
8.00
8.85
10.06
11.03
11.20
9.19
14.27
18.03
21.05
19.25
18.95
25.05
22.74
21.10
24.29
25.49
9.00
6.00
7.00
8.00
8.50
10.50
8.50
14.00
17.00
20.00
20.50
20.50
27.00
25.00
23.00
26.00
26.50
5.03
3.19
3.58
4.14
4.60
4.62
3.64
6.11
8.06
9.68
8.59
8.39
11.73
10.39
9.44
11.08
11.72
5.02
3.17
3.56
4.12
4.58
4.61
3.62
6.10
8.06
9.69
8.59
8.39
11.75
10.40
9.45
11.10
11.74
4.50
3.50
3.00
3.50
4.00
5.50
4.00
7.00
9.00
10.50
10.00
9.50
13.50
12.00
12.00
13.00
13.00
APPENDIX III
84
83
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
124.05
121.41
111.94
105.12
103.25
96.85
111.06
115.66
119.12
118.00
115.03
125.42
135.74
108.63
119.04
122.76
115.93
121.34
138.55
124.42
126.08
128.90
133.21
136.98
129.49
127.94
132.35
132.99
124.91
122.67
126.20
125.62
120.23
116.55
107.11
100.76
97.86
96.31
99.02
96.95
92.62
87.16
97.89
93.66
105.90
105.19
91.59
124.03
121.39
111.93
105.11
103.23
96.83
111.04
115.64
119.10
117.98
115.01
125.40
135.72
108.61
119.02
122.74
115.91
121.32
138.53
124.40
126.06
128.88
133.19
136.96
129.47
127.93
132.33
132.97
124.90
122.66
126.19
125.61
120.22
116.54
107.09
100.74
97.85
96.30
99.00
96.94
92.61
87.15
97.88
93.65
105.90
105.19
91.59
122.50 89.16 89.16 89.50 28.12 28.18 29.00

120.00 86.69 86.69 87.00 26.67 26.73 28.00
111.00 78.14 78.15 78.00 22.25 22.30 21.50
104.00 71.93 71.94 71.50 18.97 19.01 18.00
102.50 70.19 70.20 70.50 18.05 18.09 17.00
96.50 64.56 64.58 65.50 15.53 15.56 14.50
109.50 76.88 76.89 76.50 20.79 20.84 20.00
114.00 80.91 80.92 80.50 22.56 22.61 22.00
115.50 83.80 83.80 81.50 23.49 23.54 23.00
114.50 82.71 82.71 80.50 22.79 22.84 22.50
116.50 79.95 79.95 82.50 21.30 21.35 23.50
126.50 89.31 89.30 91.00 25.75 25.80 27.00
136.50 98.78 98.76 100.00 30.64 30.69 31.00
111.50 73.80 73.80 78.50 17.71 17.75 23.00
120.50 83.08 83.07 85.50 21.77 21.81 23.50
124.00 86.40 86.39 88.50 23.20 23.25 25.00
117.00 80.09 80.08 82.50 20.01 20.05 22.00
122.00 84.98 84.98 86.00 22.16 22.21 23.50
139.00 100.80 100.78 102.00 29.80 29.85 31.50
125.50 87.47 87.46 90.00 22.57 22.62 25.50
127.50 88.92 88.91 91.50 23.07 23.12 26.00
130.00 91.47 91.46 94.00 24.14 24.19 27.00
134.00 95.44 95.43 97.50 25.98 26.03 28.00
138.00 98.81 98.79 100.50 27.09 27.14 29.50
130.50 91.65 91.63 93.50 23.12 23.17 25.00
129.00 90.12 90.11 92.00 22.13 22.18 23.00
133.00 94.21 94.20 96.00 23.95 24.00 26.00
133.50 94.76 94.75 95.50 24.01 24.05 24.00
125.00 86.93 86.92 87.00 19.45 19.49 19.00
123.00 84.73 84.72 85.50 18.19 18.23 18.50
126.00 88.00 87.98 88.00 19.44 19.48 19.50
125.50 87.36 87.35 87.50 18.89 18.93 19.00
120.50 82.18 82.16 83.00 16.31 16.34 16.50
117.00 78.45 78.44 78.50 14.00 14.04 13.00
107.50 69.58 69.57 70.00 10.50 10.52 9.50
101.00 63.69 63.68 63.50 8.41 8.43 7.50
97.50 60.96 60.95 61.00 7.42 7.43 6.50
96.00 59.44 59.44 59.50 6.81 6.82 6.00
99.00 61.50 61.49 61.50 6.71 6.72 6.00
97.00 59.49 59.48 59.00 5.98 5.99 4.50
92.00 55.46 55.46 54.50 4.85 4.86 3.50
86.50 50.47 50.47 49.50 3.68 3.68 2.50
97.50 59.97 59.96 59.00 5.43 5.44 4.00
93.00 55.68 55.67 55.00 3.87 3.87 2.50
105.50 66.79 66.78 66.00 5.47 5.48 4.00
105.00 66.01 65.99 65.50 4.98 4.99 3.50
91.50 52.75 52.74 52.50 1.94 1.94 1.00
13.20
12.31
9.81
7.95
7.44
6.15
8.76
9.65
9.99
9.57
8.75
11.04
13.67
6.72
8.66
9.33
7.68
8.69
12.47
8.65
8.83
9.29
10.14
10.47
8.42
7.88
8.67
8.61
6.31
5.70
6.16
5.85
4.73
3.68
2.45
1.78
1.47
1.28
1.16
0.96
0.70
0.46
0.76
0.42
0.58
0.48
0.09
13.22
12.33
9.82
7.95
7.44
6.14
8.77
9.66
10.01
9.58
8.75
11.06
13.70
6.72
8.67
9.35
7.69
8.70
12.49
8.66
8.84
9.30
10.16
10.48
8.44
7.89
8.68
8.62
6.31
5.70
6.16
5.85
4.73
3.67
2.44
1.77
1.46
1.26
1.14
0.95
0.68
0.45
0.74
0.40
0.57
0.46
0.09
14.50
14.00
9.50
7.50
7.00
6.00
8.00
9.50
10.00
9.50
10.00
12.50
14.00
10.00
10.00
11.00
9.00
10.00
13.50
11.00
11.50
12.00
12.00
12.50
10.00
9.00
10.50
9.00
6.00
5.50
6.00
5.50
5.00
3.00
2.00
1.50
1.00
1.00
1.00
0.50
0.50
0.00
0.50
0.00
0.50
0.00
0.00
APPENDIX IV
TABLE 4(C)
CNGU Option Prices Calculated Using Historical Volatility (0.38) .
Deep ITM (750)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
83
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
ITM (800)
OTM (950)
Deep OTM (1000)
Bsm1
absm1
True1
Bsm2
absm2
True2
121.33
105.69
123.87
152.94
173.56
150.11
136.22
164.14
199.22
162.46
141.79
152.96
169.14
159.22
137.60
141.02
163.74
168.47
138.19
154.74
123.04
105.15
104.39
107.07
110.56
111.04
118.92
127.11
151.33
134.81
125.64
128.65
124.51
108.70
84.85
134.71
113.68
121.78
124.79
118.91
122.19
117.56
121.41
105.79
123.94
152.97
173.57
150.14
136.27
164.15
199.20
162.48
141.82
152.98
169.14
159.23
137.64
141.05
163.74
168.46
138.21
154.74
123.08
105.21
104.45
107.13
110.61
111.08
118.96
127.13
151.33
134.82
125.66
128.66
124.52
108.74
84.91
134.70
113.71
121.79
124.79
118.92
122.19
117.57
127.50
111.00
132.00
159.50
182.50
159.00
147.00
174.00
207.00
171.00
155.00
166.50
180.00
170.50
150.00
153.00
173.00
177.50
149.50
165.50
134.00
117.50
115.00
117.50
120.50
119.50
126.50
134.50
158.00
142.00
131.00
134.00
131.00
115.00
92.00
142.00
122.00
128.00
131.00
125.00
127.50
119.00
90.64
77.32
92.65
117.89
136.22
115.02
102.74
127.26
159.01
125.60
107.03
116.74
131.04
122.06
102.94
105.62
125.64
129.74
102.82
117.25
89.35
74.18
73.43
75.53
78.33
78.37
84.87
91.72
112.70
98.09
89.80
92.24
88.55
75.11
55.68
96.63
78.54
85.21
87.61
82.46
84.75
80.66
90.77
77.45
92.77
117.98
136.29
115.11
102.84
127.34
159.05
125.67
107.13
116.82
131.10
122.13
103.04
105.71
125.70
129.79
102.91
117.32
89.44
74.29
73.54
75.64
78.43
78.47
84.96
91.80
112.75
98.16
89.87
92.31
88.63
75.20
55.78
96.69
78.62
85.28
87.68
82.53
84.81
80.72
97.00
84.00
101.50
127.50
148.50
127.00
115.50
140.00
169.00
137.00
121.50
131.50
142.00
134.00
116.50
119.00
135.50
139.00
115.50
129.00
100.50
85.00
83.00
84.50
87.00
85.50
92.50
99.50
119.00
105.50
94.50
97.00
95.00
81.50
62.00
104.50
87.00
91.50
94.00
88.50
90.00
82.00
32.00
25.47
32.72
45.88
56.23
43.59
36.87
50.00
68.91
48.68
38.06
42.98
50.69
45.45
35.21
36.00
46.41
48.42
34.01
41.18
26.90
20.21
19.75
20.44
21.42
20.92
23.43
26.19
35.81
28.61
24.30
25.12
23.34
17.82
11.03
25.60
18.10
20.41
21.11
18.89
19.02
17.28
32.09
25.53
32.81
46.01
56.37
43.71
36.97
50.13
69.06
48.81
38.17
43.10
50.82
45.57
35.31
36.10
46.54
48.55
34.11
41.29
26.98
20.25
19.79
20.48
21.47
20.97
23.49
26.26
35.91
28.69
24.36
25.19
23.40
17.85
11.03
25.67
18.14
20.46
21.17
18.93
19.07
17.32
34.50
28.00
38.50
53.50
67.00
54.00
47.50
61.00
80.50
59.00
51.50
57.50
61.00
56.00
45.50
46.50
54.50
56.00
43.50
51.00
34.50
26.50
25.00
25.50
26.50
24.50
27.00
29.50
40.00
32.50
24.50
25.00
25.50
20.50
12.00
30.50
22.50
22.50
23.50
21.50
20.50
17.50
21.53
16.73
22.00
31.87
39.86
29.93
24.82
34.73
49.54
33.61
25.44
29.06
34.85
30.81
23.14
23.58
31.25
32.70
21.98
27.16
16.76
12.14
11.80
12.22
12.84
12.39
14.02
15.84
22.46
17.38
14.31
14.80
13.57
9.96
5.78
14.78
9.91
11.31
11.70
10.26
10.18
9.06
21.57
16.74
22.04
31.96
39.97
30.01
24.88
34.82
49.68
33.70
25.50
29.14
34.95
30.89
23.19
23.63
31.34
32.79
22.03
27.23
16.78
12.14
11.79
12.22
12.84
12.38
14.03
15.86
22.52
17.41
14.32
14.82
13.58
9.95
5.74
14.80
9.91
11.31
11.70
10.25
10.17
9.05
24.50
18.00
28.00
37.50
51.00
38.00
33.50
44.50
60.50
42.50
36.50
41.00
45.00
40.00
32.50
32.50
39.00
40.50
30.50
35.50
24.00
17.00
15.50
16.00
17.00
15.00
17.00
19.50
26.00
21.00
14.50
15.00
15.50
11.50
6.50
19.00
13.00
12.50
13.00
11.50
11.00
9.00
APPENDIX V
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
105.53
106.03
101.42
98.90
93.39
105.12
129.57
111.96
100.56
93.87
88.24
80.71
67.92
99.05
80.02
76.54
81.01
76.40
81.18
95.39
104.06
98.46
105.55
106.05
101.44
98.92
93.42
105.13
129.55
111.95
100.56
93.88
88.26
80.74
67.96
99.04
80.03
76.55
81.02
76.41
81.18
95.37
104.04
98.44
110.00
110.50
105.00
101.50
96.50
107.50
131.00
114.50
103.50
97.00
90.00
82.00
68.50
99.50
80.50
76.50
81.00
76.50
81.00
95.00
104.00
98.50
70.46
70.70
66.76
64.17
59.55
68.85
89.29
74.09
64.05
58.44
53.78
47.74
38.02
61.12
45.94
43.06
46.13
42.38
45.00
55.02
61.74
55.91
70.54
70.78
66.83
64.25
59.63
68.91
89.33
74.14
64.11
58.51
53.85
47.81
38.10
61.17
46.01
43.13
46.20
42.44
45.05
55.05
61.77
55.93
75.50
75.50
70.00
67.00
62.50
71.50
91.00
77.00
67.50
61.50
55.00
48.50
38.50
61.50
45.50
42.50
45.50
41.50
44.50
53.00
61.50
56.00
13.58
13.44
12.01
10.64
9.17
11.54
17.93
12.60
9.07
7.48
6.26
4.88
3.13
6.73
3.75
3.16
3.44
2.76
2.60
3.24
3.90
2.37
13.60
13.46
12.02
10.64
9.17
11.56
17.97
12.62
9.07
7.48
6.24
4.86
3.09
6.72
3.72
3.13
3.41
2.73
2.57
3.22
3.89
2.35
15.50
15.50
12.50
11.00
9.50
12.00
18.50
13.50
9.50
8.00
6.00
4.50
2.50
6.00
3.00
2.50
2.50
2.00
2.00
2.00
3.00
2.00
6.84
6.72
5.86
4.99
4.17
5.39
8.91
5.87
3.89
3.08
2.47
1.83
1.08
2.51
1.24
1.00
1.08
0.82
0.71
0.84
1.02
0.49
6.82
6.69
5.83
4.96
4.14
5.37
8.90
5.84
3.86
3.04
2.43
1.79
1.04
2.47
1.21
0.97
1.05
0.79
0.68
0.81
0.99
0.47
8.00
8.00
6.00
5.00
4.00
5.50
9.00
6.50
4.00
3.50
2.00
1.50
0.50
2.00
1.00
0.50
0.50
0.50
0.50
0.50
0.50
0.50
TABLE 4(D)
CNGU Option Prices Calculated Using Historical Volatility (=0.40)
Deep ITM (750)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
ITM (800)
OTM (950)
Deep OTM(1000)
Bsm1
absm1
True1
Bsm2
absm2
True2
124.20
108.69
126.67
155.41
175.77
152.52
138.78
166.36
201.01
164.65
144.14
155.17
171.14
161.31
139.93
143.24
165.65
170.31
124.27
108.77
126.73
155.44
175.78
152.55
138.83
166.37
201.00
164.67
144.18
155.20
171.14
161.33
139.96
143.26
165.66
170.31
127.50
111.00
132.00
159.50
182.50
159.00
147.00
174.00
207.00
171.00
155.00
166.50
180.00
170.50
150.00
153.00
173.00
177.50
94.00
80.70
95.96
121.00
139.13
118.08
105.89
130.17
161.54
128.47
110.02
119.62
133.75
124.85
105.89
108.47
128.26
132.29
94.11
80.81
96.06
121.08
139.19
118.16
105.98
130.23
161.57
128.54
110.10
119.69
133.81
124.91
105.97
108.55
128.31
132.34
97.00
84.00
101.50
127.50
148.50
127.00
115.50
140.00
169.00
137.00
121.50
131.50
142.00
134.00
116.50
119.00
135.50
139.00
35.24
28.43
35.97
49.50
60.02
47.11
40.21
53.63
72.73
52.26
41.37
46.40
54.24
48.90
38.39
39.17
49.80
51.83
35.32
28.48
36.05
49.61
60.14
47.22
40.30
53.74
72.86
52.37
41.46
46.50
54.35
49.00
38.48
39.26
49.91
51.94
34.50
28.00
38.50
53.50
67.00
54.00
47.50
61.00
80.50
59.00
51.50
57.50
61.00
56.00
45.50
46.50
54.50
56.00
24.36
19.22
24.83
35.19
43.45
33.14
27.78
38.10
53.29
36.92
28.39
32.16
38.16
33.96
25.94
26.37
34.36
35.85
24.40
19.24
24.87
35.27
43.55
33.21
27.84
38.19
53.41
37.01
28.44
32.23
38.25
34.04
25.99
26.42
34.44
35.93
24.50
18.00
28.00
37.50
51.00
38.00
33.50
44.50
60.50
42.50
36.50
41.00
45.00
40.00
32.50
32.50
39.00
40.50
APPENDIX VI
83
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
140.36
156.69
125.29
107.58
106.81
109.44
112.86
113.26
121.03
129.09
153.00
136.65
127.50
130.45
126.33
110.69
87.07
136.26
115.47
123.44
126.38
120.55
123.69
119.08
107.17
107.64
103.05
100.46
94.99
106.53
130.65
113.22
101.85
95.21
89.62
82.15
69.48
100.09
81.27
77.79
82.16
77.57
82.15
96.04
104.58
98.90
140.39
156.70
125.33
107.64
106.87
109.49
112.91
113.31
121.06
129.11
153.00
136.66
127.52
130.46
126.35
110.73
87.13
136.26
115.49
123.45
126.39
120.56
123.69
119.09
107.19
107.66
103.08
100.48
95.01
106.54
130.64
113.22
101.86
95.22
89.64
82.18
69.52
100.09
81.29
77.81
82.18
77.58
82.16
96.03
104.56
98.89
149.50
165.50
134.00
117.50
115.00
117.50
120.50
119.50
126.50
134.50
158.00
142.00
131.00
134.00
131.00
115.00
92.00
142.00
122.00
128.00
131.00
125.00
127.50
119.00
110.00
110.50
105.00
101.50
96.50
107.50
131.00
114.50
103.50
97.00
90.00
82.00
68.50
99.50
80.50
76.50
81.00
76.50
81.00
95.00
104.00
98.50
105.63
119.90
92.17
77.08
76.31
78.39
81.14
81.12
87.55
94.32
115.05
100.58
92.29
94.68
91.01
77.65
58.27
98.86
80.92
87.50
89.85
84.72
86.90
82.82
72.69
72.90
68.95
66.30
61.68
70.87
91.05
75.99
65.95
60.36
55.70
49.66
39.93
62.80
47.71
44.80
47.82
44.05
46.54
56.32
62.91
56.98
105.71
119.95
92.26
77.17
76.40
78.48
81.23
81.20
87.63
94.39
115.10
100.64
92.36
94.75
91.07
77.73
58.35
98.91
80.99
87.56
89.91
84.78
86.95
82.87
72.75
72.96
69.02
66.36
61.74
70.93
91.08
76.04
66.00
60.42
55.76
49.72
40.00
62.84
47.76
44.86
47.88
44.10
46.58
56.35
62.93
57.00
115.50
129.00
100.50
85.00
83.00
84.50
87.00
85.50
92.50
99.50
119.00
105.50
94.50
97.00
95.00
81.50
62.00
104.50
87.00
91.50
94.00
88.50
90.00
82.00
75.50
75.50
70.00
67.00
62.50
71.50
91.00
77.00
67.50
61.50
55.00
48.50
38.50
61.50
45.50
42.50
45.50
41.50
44.50
53.00
61.50
56.00
37.10
44.43
29.70
22.69
22.19
22.91
23.93
23.38
26.00
28.87
38.76
31.34
26.84
27.69
25.82
20.03
12.77
28.11
20.27
22.69
23.41
21.07
21.18
19.34
15.42
15.27
13.73
12.23
10.64
13.19
19.91
14.29
10.48
8.75
7.40
5.87
3.87
7.88
4.56
3.89
4.20
3.43
3.23
3.94
4.68
2.93
37.18
44.53
29.76
22.73
22.23
22.95
23.98
23.43
26.06
28.93
38.84
31.41
26.90
27.75
25.88
20.06
12.78
28.17
20.31
22.73
23.46
21.12
21.23
19.38
15.45
15.29
13.74
12.24
10.64
13.20
19.95
14.32
10.48
8.75
7.39
5.86
3.85
7.88
4.54
3.87
4.18
3.41
3.21
3.93
4.67
2.91
43.50
51.00
34.50
26.50
25.00
25.50
26.50
24.50
27.00
29.50
40.00
32.50
24.50
25.00
25.50
20.50
12.00
30.50
22.50
22.50
23.50
21.50
20.50
17.50
15.50
15.50
12.50
11.00
9.50
12.00
18.50
13.50
9.50
8.00
6.00
4.50
2.50
6.00
3.00
2.50
2.50
2.00
2.00
2.00
3.00
2.00
24.67
30.08
19.10
14.13
13.74
14.20
14.86
14.35
16.11
18.05
25.05
19.68
16.38
16.90
15.57
11.66
7.02
16.83
11.58
13.09
13.51
11.93
11.83
10.61
8.15
8.01
7.06
6.06
5.13
6.50
10.38
7.03
4.78
3.84
3.13
2.37
1.45
3.16
1.65
1.35
1.44
1.12
0.97
1.13
1.35
0.68
24.71
30.15
19.12
14.13
13.74
14.20
14.87
14.36
16.13
18.08
25.10
19.71
16.40
16.92
15.59
11.66
6.99
16.85
11.58
13.10
13.51
11.93
11.83
10.61
8.14
8.00
7.04
6.04
5.10
6.49
10.38
7.01
4.76
3.82
3.10
2.34
1.42
3.13
1.62
1.32
1.41
1.09
0.94
1.11
1.32
0.66
30.50
35.50
24.00
17.00
15.50
16.00
17.00
15.00
17.00
19.50
26.00
21.00
14.50
15.00
15.50
11.50
6.50
19.00
13.00
12.50
13.00
11.50
11.00
9.00
8.00
8.00
6.00
5.00
4.00
5.50
9.00
6.50
4.00
3.50
2.00
1.50
0.50
2.00
1.00
0.50
0.50
0.50
0.50
0.50
0.50
0.50
APPENDIX VII
TABLE 4(E)
HSBC Option Prices Calculated Using Historical Volatility (=0.34)
Deep ITM (650)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
83
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
ITM (700)
OTM (900)
Deep OTM (950)
Bsm1
absm1
True1
Bsm2
absm2
True2
83.46
92.39
106.04
125.48
120.18
112.17
105.81
118.41
142.91
130.71
123.39
121.48
139.74
120.36
99.50
114.06
145.63
148.50
142.67
155.68
131.87
104.62
117.87
122.84
125.69
140.69
146.82
146.61
159.86
150.48
131.70
157.90
167.65
169.90
185.67
199.75
193.28
206.60
215.81
210.73
213.46
207.89
83.53
92.45
106.08
125.49
120.20
112.20
105.84
118.43
142.90
130.71
123.40
121.49
139.73
120.37
99.54
114.07
145.61
148.48
142.65
155.65
131.86
104.63
117.87
122.84
125.68
140.67
146.79
146.59
159.83
150.44
131.68
157.87
167.61
169.86
185.63
199.71
193.25
206.57
215.79
210.71
213.43
207.87
88.00
97.00
109.50
127.00
124.50
117.50
112.50
124.50
145.00
133.50
126.50
125.50
143.00
124.50
103.00
118.00
147.50
151.00
145.50
159.50
136.00
110.00
123.00
128.00
130.50
145.00
151.00
150.50
163.00
154.00
134.00
159.50
168.50
171.00
185.50
199.50
193.50
207.00
216.50
211.50
214.00
208.50
55.43
62.49
73.58
89.87
85.26
78.24
72.82
83.28
104.35
93.63
87.07
85.32
100.98
84.15
66.70
78.45
105.62
108.03
102.76
114.23
92.93
69.75
80.69
84.80
87.12
99.83
105.14
104.84
116.63
108.05
91.11
114.30
123.09
125.05
139.68
152.71
146.45
159.05
167.84
162.86
165.28
159.82
55.54
62.60
73.67
89.94
85.33
78.32
72.91
83.36
104.40
93.70
87.14
85.39
101.02
84.22
66.79
78.52
105.66
108.06
102.80
114.25
92.98
69.83
80.75
84.85
87.17
99.86
105.16
104.86
116.64
108.06
91.14
114.30
123.08
125.04
139.65
152.68
146.42
159.02
167.80
162.83
165.24
159.78
58.00
65.00
75.00
89.50
89.00
83.00
78.00
89.00
105.00
95.00
89.00
87.50
103.00
87.00
68.50
81.00
106.50
110.00
104.50
118.50
97.00
74.50
85.50
89.50
91.50
104.00
109.50
107.50
119.50
110.00
91.50
114.50
122.50
125.00
138.50
151.00
145.50
158.50
167.50
162.50
165.50
160.00
6.64
8.06
10.58
14.86
13.42
11.22
9.77
12.28
18.28
14.88
12.67
12.07
16.27
11.50
7.44
9.66
16.72
17.25
15.51
18.81
12.21
6.94
9.03
9.80
10.19
12.80
14.02
13.75
16.89
14.21
9.53
15.10
17.44
17.80
22.40
26.30
23.60
28.11
31.42
28.96
28.86
26.26
6.60
8.03
10.57
14.88
13.43
11.22
9.76
12.28
18.32
14.90
12.68
12.07
16.30
11.50
7.42
9.65
16.75
17.29
15.53
18.86
12.22
6.92
9.02
9.80
10.18
12.82
14.04
13.77
16.92
14.24
9.52
15.13
17.49
17.84
22.46
26.38
23.67
28.18
31.51
29.04
28.93
26.34
5.50
7.00
9.50
11.50
13.00
12.00
11.00
13.00
13.50
11.00
9.50
9.00
12.50
8.50
5.00
7.00
12.50
13.00
11.00
14.50
8.50
4.50
6.00
7.00
7.00
9.50
10.00
10.50
14.50
11.00
6.50
11.00
11.50
13.00
16.50
16.00
15.50
20.00
22.00
19.50
20.00
17.50
3.54
4.37
5.89
8.56
7.63
6.20
5.30
6.81
10.60
8.40
6.96
6.57
9.15
6.18
3.79
5.02
9.27
9.57
8.45
10.49
6.36
3.35
4.49
4.90
5.10
6.52
7.20
7.02
8.84
7.22
4.50
7.60
8.93
9.09
11.81
14.04
12.31
15.03
17.06
15.42
15.11
13.44
3.48
4.32
5.85
8.54
7.60
6.16
5.26
6.78
10.59
8.38
6.92
6.53
9.13
6.15
3.74
4.97
9.25
9.55
8.43
10.48
6.33
3.31
4.45
4.87
5.06
6.50
7.18
6.99
8.82
7.20
4.47
7.58
8.92
9.08
11.82
14.07
12.33
15.06
17.10
15.45
15.15
13.47
3.00
4.00
5.00
6.00
7.50
6.50
5.50
7.50
7.00
5.50
4.50
4.50
6.50
4.00
2.00
3.00
6.50
6.50
5.50
7.50
4.00
1.50
2.50
3.00
3.00
4.00
4.50
4.50
7.00
4.50
2.50
4.50
4.50
5.50
7.50
6.50
6.50
8.00
8.00
7.00
7.00
6.00
APPENDIX VIII
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
191.52
198.37
198.57
187.17
198.16
239.56
243.94
223.39
206.69
195.66
189.77
178.94
179.85
184.07
184.46
174.67
157.73
155.12
160.24
158.98
166.68
157.51
191.50
198.35
198.55
187.14
198.14
239.55
243.93
223.38
206.68
195.64
189.76
178.92
179.83
184.06
184.45
174.66
157.71
155.11
160.23
158.98
166.67
157.51
192.00
199.00
199.00
187.00
198.00
239.00
244.00
224.00
207.50
196.00
190.00
179.00
180.00
184.50
184.50
174.50
157.50
155.00
159.50
158.50
166.50
157.50
144.03
150.50
150.63
139.47
149.92
190.34
194.63
174.29
157.74
146.92
141.13
130.59
131.37
135.19
135.48
125.91
109.51
106.90
111.43
109.88
117.28
108.05
144.00
150.47
150.59
139.43
149.89
190.32
194.60
174.26
157.71
146.88
141.10
130.56
131.34
135.16
135.45
125.88
109.48
106.87
111.40
109.86
117.26
108.03
143.50
150.50
150.50
138.50
149.00
189.50
194.50
175.00
158.50
147.50
142.00
131.00
132.00
135.50
136.00
126.00
109.50
107.00
110.50
109.50
117.00
108.00
20.12
22.03
21.72
16.97
20.01
36.52
38.20
28.13
20.28
16.24
14.13
10.98
10.81
10.59
10.27
7.81
4.74
4.12
3.87
2.87
3.38
1.71
20.17
22.09
21.78
17.02
20.07
36.61
38.29
28.20
20.33
16.29
14.16
11.00
10.83
10.62
10.29
7.81
4.72
4.11
3.86
2.85
3.37
1.68
12.50
14.50
14.00
10.50
12.50
27.00
28.50
19.50
12.00
8.00
7.50
5.00
5.00
5.00
5.00
3.50
1.50
1.50
0.50
0.50
0.50
0.00
9.75
10.78
10.53
7.68
9.28
19.02
19.96
13.65
8.94
6.76
5.64
4.10
3.97
3.71
3.51
2.46
1.31
1.08
0.92
0.57
0.67
0.24
9.75 3.50
10.79 5.00
10.54 4.50
7.68 3.00
9.28 3.50
19.07 10.50
20.02 11.00
13.68 6.50
8.94 3.50
6.75 1.50
5.63 1.50
4.08 1.00
3.95 1.00
3.68 1.00
3.48 1.00
2.43 0.50
1.28 0.00
1.05 0.00
0.89 0.00
0.55 0.00
0.65 0.00
0.23 0.00
TABLE 4(F)
HSBC Option Prices Calculated Using Historical Volatility(=0.40)
Deep ITM (650)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
83
ITM (700)
OTM (900)
Deep OTM (950)
Bsm1
absm1
True1
Bsm2
absm2
True2
91.29
99.92
113.06
131.77
126.61
118.72
112.55
124.66
148.18
136.37
129.14
127.27
144.80
126.08
105.93
119.76
150.08
152.81
147.13
91.36
99.98
113.11
131.80
126.65
118.77
112.60
124.69
148.19
136.39
129.17
127.29
144.81
126.10
105.97
119.79
150.08
152.80
147.13
88.00
97.00
109.50
127.00
124.50
117.50
112.50
124.50
145.00
133.50
126.50
125.50
143.00
124.50
103.00
118.00
147.50
151.00
145.50
64.35
71.36
82.27
98.16
93.62
86.61
81.27
91.46
111.83
101.39
94.85
93.12
108.23
91.88
74.77
86.10
112.32
114.59
109.46
64.45
71.46
82.36
98.24
93.70
86.70
81.36
91.54
111.89
101.46
94.93
93.19
108.29
91.95
74.86
86.17
112.37
114.63
109.50
58.00
65.00
75.00
89.50
89.00
83.00
78.00
89.00
105.00
95.00
89.00
87.50
103.00
87.00
68.50
81.00
106.50
110.00
104.50
11.62
13.56
16.88
22.23
20.45
17.63
15.76
18.94
26.19
22.12
19.35
18.59
23.70
17.85
12.55
15.43
24.09
24.69
22.61
11.61
13.56
16.89
22.27
20.48
17.65
15.77
18.97
26.24
22.16
19.37
18.61
23.74
17.87
12.55
15.44
24.13
24.74
22.65
5.50
7.00
9.50
11.50
13.00
12.00
11.00
13.00
13.50
11.00
9.50
9.00
12.50
8.50
5.00
7.00
12.50
13.00
11.00
7.12
8.41
10.65
14.38
13.09
11.06
9.76
11.91
16.98
14.06
12.05
11.50
15.01
10.95
7.41
9.22
15.07
15.45
13.97
7.08
8.38
10.63
14.37
13.08
11.04
9.73
11.90
16.99
14.06
12.04
11.49
15.01
10.93
7.37
9.20
15.07
15.45
13.97
3.00
4.00
5.00
6.00
7.50
6.50
5.50
7.50
7.00
5.50
4.50
4.50
6.50
4.00
2.00
3.00
6.50
6.50
5.50
APPENDIX IX
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
159.62
136.46
110.18
122.87
127.59
130.26
144.52
150.37
150.11
162.85
153.71
135.38
160.64
170.04
172.16
187.46
201.09
194.70
207.73
216.75
211.71
214.26
208.73
192.57
199.27
199.41
188.03
198.83
239.83
244.16
223.71
207.05
196.09
190.22
179.46
180.32
184.39
184.74
175.00
158.18
155.56
160.50
159.15
166.78
157.59
159.61
136.47
110.21
122.89
127.60
130.27
144.51
150.36
150.09
162.83
153.70
135.37
160.62
170.01
172.14
187.43
201.05
194.67
207.70
216.72
211.67
214.23
208.70
192.54
199.23
199.38
188.00
198.80
239.81
244.14
223.69
207.03
196.06
190.19
179.44
180.30
184.37
184.72
174.98
158.16
155.54
160.49
159.14
166.77
157.58
159.50
136.00
110.00
123.00
128.00
130.50
145.00
151.00
150.50
163.00
154.00
134.00
159.50
168.50
171.00
185.50
199.50
193.50
207.00
216.50
211.50
214.00
208.50
192.00
199.00
199.00
187.00
198.00
239.00
244.00
224.00
207.50
196.00
190.00
179.00
180.00
184.50
184.50
174.50
157.50
155.00
159.50
158.50
166.50
157.50
120.43
99.70
77.15
87.74
91.65
93.84
105.89
110.93
110.58
121.84
113.52
96.99
119.22
127.60
129.41
143.40
155.76
149.64
161.77
170.22
165.32
167.44
162.06
146.67
152.86
152.91
141.84
151.91
191.35
195.51
175.47
159.07
148.43
142.71
132.38
133.05
136.51
136.71
127.28
111.26
108.63
112.72
110.91
118.05
108.73
120.47
99.75
77.23
87.80
91.71
93.89
105.93
110.96
110.61
121.86
113.54
97.04
119.24
127.60
129.41
143.39
155.75
149.63
161.74
170.19
165.29
167.41
162.04
146.65
152.84
152.88
141.82
151.88
191.32
195.48
175.44
159.05
148.41
142.69
132.36
133.02
136.48
136.68
127.26
111.25
108.62
112.70
110.89
118.03
108.71
118.50
97.00
74.50
85.50
89.50
91.50
104.00
109.50
107.50
119.50
110.00
91.50
114.50
122.50
125.00
138.50
151.00
145.50
158.50
167.50
162.50
165.50
160.00
143.50
150.50
150.50
138.50
149.00
189.50
194.50
175.00
158.50
147.50
142.00
131.00
132.00
135.50
136.00
126.00
109.50
107.00
110.50
109.50
117.00
108.00
26.46
18.52
11.73
14.48
15.46
15.93
19.11
20.55
20.21
23.88
20.71
14.91
21.66
24.34
24.72
29.84
33.97
31.00
35.82
39.28
36.62
36.35
33.55
26.83
28.87
28.49
23.10
26.42
43.72
45.34
34.92
26.39
21.91
19.48
15.80
15.56
15.18
14.76
11.77
7.85
6.99
6.58
5.12
5.80
3.31
26.52
18.55
11.72
14.49
15.47
15.95
19.14
20.59
20.24
23.93
20.75
14.92
21.70
24.40
24.77
29.91
34.05
31.07
35.90
39.37
36.70
36.43
33.62
26.89
28.94
28.56
23.15
26.48
43.80
45.42
34.99
26.45
21.96
19.52
15.83
15.59
15.21
14.79
11.79
7.85
6.99
6.58
5.11
5.80
3.30
14.50
8.50
4.50
6.00
7.00
7.00
9.50
10.00
10.50
14.50
11.00
6.50
11.00
11.50
13.00
16.50
16.00
15.50
20.00
22.00
19.50
20.00
17.50
12.50
14.50
14.00
10.50
12.50
27.00
28.50
19.50
12.00
8.00
7.50
5.00
5.00
5.00
5.00
3.50
1.50
1.50
0.50
0.50
0.50
0.00
16.60
11.07
6.64
8.37
8.96
9.24
11.21
12.12
11.85
14.25
12.10
8.26
12.53
14.25
14.44
17.82
20.43
18.33
21.54
23.86
21.93
21.47
19.48
14.97
16.21
15.88
12.23
14.21
25.52
26.51
19.35
13.61
10.83
9.34
7.23
7.02
6.59
6.28
4.73
2.87
2.45
2.14
1.46
1.65
0.74
16.61 7.50
11.06 4.00
6.61 1.50
8.34 2.50
8.94 3.00
9.22 3.00
11.20 4.00
12.12 4.50
11.85 4.50
14.25 7.00
12.10 4.50
8.24 2.50
12.53 4.50
14.26 4.50
14.45 5.50
17.85 7.50
20.47 6.50
18.36 6.50
21.59 8.00
23.91 8.00
21.97 7.00
21.51 7.00
19.51 6.00
14.99 3.50
16.24 5.00
15.90 4.50
12.24 3.00
14.23 3.50
25.58 10.50
26.56 11.00
19.39 6.50
13.63 3.50
10.84 1.50
9.35 1.50
7.22 1.00
7.01 1.00
6.58 1.00
6.27 1.00
4.71 0.50
2.84 0.00
2.43 0.00
2.12 0.00
1.43 0.00
1.62 0.00
0.72 0.00
APPENDIX X
TABLE 4(G)
LONMIN Option Prices Calculated Historical Volatility (=0.39)
Deep ITM (700)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
83
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
ITM (750)
OTM (1100)
Deep OTM (1150)
Bsm1
absm1
True1
Bsm2
absm2
True2
174.94
149.37
153.32
169.24
167.17
163.89
154.11
157.89
163.98
202.49
187.99
177.87
213.33
202.78
185.64
162.99
150.73
149.47
148.96
160.86
115.06
100.02
113.96
108.14
105.10
119.16
89.00
90.09
107.22
131.17
130.43
165.48
216.76
243.68
227.11
256.72
264.93
264.48
274.18
249.38
270.79
253.84
174.94
149.40
153.34
169.25
167.18
163.90
154.12
157.90
163.98
202.46
187.96
177.86
213.29
202.75
185.62
162.99
150.74
149.47
148.97
160.85
115.10
100.08
114.00
108.19
105.16
119.19
89.07
90.16
107.26
131.18
130.43
165.45
216.72
243.64
227.07
256.68
264.89
264.45
274.15
249.34
270.76
253.80
179.50
154.00
157.50
174.00
172.00
168.50
160.50
164.00
169.50
205.00
190.00
183.00
218.00
207.50
190.00
168.50
154.50
154.00
153.50
165.50
119.50
106.00
119.00
113.50
107.00
122.00
92.00
93.00
109.00
133.50
133.50
168.50
218.50
246.50
228.00
257.50
268.50
265.50
275.50
250.50
272.50
255.50
137.30
114.38
117.78
131.88
129.93
126.72
117.88
121.14
126.49
161.44
147.85
138.51
170.98
161.10
145.27
124.50
113.52
112.26
111.70
122.16
82.02
69.39
80.84
75.86
73.23
84.63
59.66
60.42
74.25
94.37
93.34
124.16
171.46
197.00
181.13
209.27
217.13
216.60
225.98
201.79
222.39
205.79
137.36
114.47
117.87
131.95
130.00
126.79
117.96
121.21
126.55
161.46
147.88
138.55
170.99
161.11
145.30
124.55
113.59
112.33
111.77
122.21
82.12
69.50
80.93
75.96
73.33
84.72
59.77
60.52
74.34
94.44
93.41
124.18
171.44
196.96
181.09
209.23
217.08
216.56
225.93
201.75
222.35
205.75
142.00
120.00
123.00
137.00
135.00
132.00
125.00
128.00
132.50
165.00
151.00
144.00
177.00
167.50
151.00
130.50
117.00
116.50
116.00
127.00
87.00
75.00
86.50
81.00
74.50
87.00
62.00
62.50
75.50
96.00
96.50
127.00
173.50
201.00
182.50
210.00
221.00
218.00
227.50
203.50
224.50
208.00
12.71
8.62
9.04
11.26
10.77
9.82
8.30
8.66
9.36
15.67
12.42
10.58
16.66
14.37
11.23
7.57
6.05
5.78
5.60
6.73
2.57
1.73
2.35
1.99
1.78
2.27
0.99
0.98
1.52
2.60
2.30
4.56
10.35
14.74
11.50
16.09
17.48
16.98
18.81
13.19
16.42
12.62
12.69
8.57
8.99
11.22
10.74
9.78
8.25
8.61
9.32
15.66
12.39
10.55
16.66
14.36
11.20
7.52
6.00
5.72
5.54
6.67
2.50
1.67
2.29
1.93
1.72
2.21
0.94
0.94
1.47
2.54
2.24
4.51
10.33
14.75
11.49
16.11
17.51
17.01
18.85
13.19
16.44
12.62
16.50
11.50
12.00
14.50
14.00
13.00
11.50
12.00
13.00
16.50
13.50
13.00
19.50
17.00
14.00
9.50
6.50
6.00
6.00
7.50
3.00
2.00
3.00
2.50
1.50
2.00
0.50
0.50
1.00
2.00
2.00
4.50
10.50
18.50
11.50
16.00
18.50
17.00
19.00
12.50
19.00
14.00
8.38
5.51
5.78
7.31
6.96
6.26
5.21
5.44
5.90
10.27
7.93
6.66
10.85
9.23
7.05
4.56
3.58
3.39
3.27
3.97
1.39
0.90
1.26
1.04
0.92
1.18
0.48
0.48
0.76
1.35
1.16
2.43
5.94
8.74
6.62
9.47
10.34
9.97
11.12
7.46
9.38
6.96
8.32
5.44
5.71
7.25
6.89
6.19
5.14
5.37
5.84
10.23
7.88
6.60
10.82
9.18
6.99
4.50
3.51
3.33
3.20
3.91
1.33
0.85
1.20
0.99
0.87
1.13
0.44
0.44
0.71
1.29
1.11
2.37
5.89
8.70
6.57
9.45
10.32
9.95
11.11
7.42
9.36
6.92
11.00
7.50
7.50
9.50
9.00
8.00
7.50
7.50
8.00
11.00
8.00
8.00
13.50
11.50
8.50
6.00
4.00
4.00
3.50
5.00
2.00
1.00
1.50
1.50
0.50
1.00
0.50
0.50
0.50
1.00
1.00
2.00
5.50
12.00
6.00
9.50
11.00
10.00
11.00
7.50
11.50
8.50
APPENDIX XI
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
263.62
243.81
244.01
280.19
273.83
332.79
360.66
323.04
298.81
307.22
291.84
259.53
283.40
284.67
299.56
311.75
292.72
301.62
297.32
302.08
316.78
351.61
263.59
243.78
243.98
280.17
273.80
332.78
360.65
323.03
298.80
307.21
291.83
259.51
283.39
284.67
299.55
311.75
292.72
301.62
297.31
302.08
316.78
351.61
265.00
245.00
245.00
280.50
274.50
332.50
360.50
323.50
299.50
307.50
292.00
259.50
283.50
285.00
299.50
311.50
292.00
301.00
296.50
301.50
316.50
351.50
215.25
195.90
196.03
231.26
224.92
283.30
311.03
273.50
249.32
257.64
242.34
210.31
233.90
235.06
249.85
262.02
243.02
251.87
247.52
252.24
266.91
301.73
215.20
195.85
195.99
231.22
224.88
283.27
311.02
273.47
249.30
257.62
242.31
210.27
233.87
235.04
249.84
262.01
243.01
251.86
247.51
252.24
266.91
301.73
217.50
198.00
198.00
232.00
226.00
283.50
311.00
274.00
250.00
258.50
243.00
211.00
234.50
235.50
250.00
261.50
242.50
251.00
247.00
251.50
266.50
301.50
14.12
10.23
9.94
15.60
13.80
29.33
39.36
24.85
16.47
18.03
13.86
7.72
11.20
10.01
12.37
14.55
9.98
11.14
8.66
7.79
9.86
16.23
14.13
10.21
9.93
15.63
13.82
29.41
39.47
24.92
16.50
18.07
13.89
7.71
11.21
10.01
12.39
14.58
9.99
11.16
8.66
7.79
9.87
16.28
16.50 7.84 7.81 9.50

12.00 5.44 5.40 6.50
12.00 5.24 5.20 7.00
19.00 8.52 8.50 10.50
16.00 7.38 7.35 9.00
35.50 17.24 17.27 22.50
41.50 24.01 24.07 25.50
27.00 14.10 14.11 16.00
18.50 8.63 8.61 10.00
20.00 9.49 9.48 11.00
18.50 6.97 6.95 10.50
10.50 3.54 3.50 5.00
15.00 5.36 5.32 8.00
13.50 4.55 4.52 7.00
14.50 5.75 5.72 7.00
16.50 6.86 6.84 8.00
11.00 4.36 4.33 5.00
11.50 4.89 4.86 5.00
8.50 3.47 3.43 3.50
6.50 2.87 2.84 2.00
8.00 3.72 3.69 3.00
14.00 6.32 6.31 5.50
TABLE 4(H)
LONMIN Option Prices Calculated Using Historical Volatility (=0.35)
Deep ITM (700)
Expiry
107
106
105
104
103
100
99
98
97
96
93
92
91
90
89
86
85
84
83
ITM (750)
OTM (1100)
Bsm1
absm1
True1
Bsm2
absm2
True2
171.16
144.99
149.08
165.43
163.36
160.12
150.12
154.03
160.32
199.78
185.08
174.76
211.03
200.30
182.84
159.79
147.28
146.01
145.54
171.15
145.00
149.09
165.43
163.35
160.11
150.12
154.03
160.31
199.74
185.05
174.74
210.99
200.27
182.81
159.77
147.27
146.01
145.53
179.50
154.00
157.50
174.00
172.00
168.50
160.50
164.00
169.50
205.00
190.00
183.00
218.00
207.50
190.00
168.50
154.50
154.00
153.50
132.00
108.60
112.11
126.57
124.61
121.46
112.43
115.81
121.33
157.22
143.42
133.87
167.22
157.13
140.94
119.79
108.60
107.34
106.81
132.03
108.65
112.17
126.60
124.65
121.50
112.48
115.85
121.37
157.22
143.43
133.89
167.20
157.12
140.95
119.81
108.64
107.38
106.85
142.00 8.73 8.69 16.50

120.00 5.56 5.51 11.50
123.00 5.87 5.83 12.00
137.00 7.59 7.55 14.50
135.00 7.22 7.18 14.00
132.00 6.49 6.45 13.00
125.00 5.34 5.29 11.50
128.00 5.61 5.57 12.00
132.50 6.15 6.11 13.00
165.00 11.19 11.17 16.50
151.00 8.57 8.54 13.50
144.00 7.12 7.08 13.00
177.00 12.05 12.04 19.50
167.50 10.16 10.14 17.00
151.00 7.65 7.61 14.00
130.50 4.84 4.80 9.50
117.00 3.73 3.69 6.50
116.50 3.54 3.49 6.00
116.00 3.41 3.37 6.00
Deep OTM (1150)

5.33
3.27
3.46
4.55
4.30
3.81
3.07
3.23
3.56
6.81
5.05
4.12
7.29
6.03
4.41
2.66
2.00
1.88
1.80
5.28
3.21
3.41
4.50
4.25
3.76
3.02
3.18
3.51
6.77
5.00
4.07
7.25
5.99
4.36
2.61
1.95
1.83
1.75
11.00
7.50
7.50
9.50
9.00
8.00
7.50
7.50
8.00
11.00
8.00
8.00
13.50
11.50
8.50
6.00
4.00
4.00
3.50
APPENDIX XII
82
79
78
77
76
75
72
71
70
69
68
65
64
63
62
61
58
57
56
55
54
51
50
49
48
47
44
43
42
41
40
37
36
35
34
33
30
29
28
27
26
23
20
19
16
157.78
110.96
95.58
109.91
103.99
100.92
115.49
84.62
85.78
103.38
128.01
127.41
163.36
215.62
242.90
226.18
256.18
264.47
264.04
273.83
248.88
270.49
253.47
263.32
243.42
243.65
280.04
273.67
332.75
360.64
323.00
298.77
307.19
291.80
259.45
283.36
284.65
299.54
311.75
292.72
301.61
297.31
302.08
316.78
351.61
Notes:
157.77
110.98
95.62
109.93
104.02
100.95
115.50
84.66
85.82
103.40
128.01
127.40
163.33
215.58
242.87
226.15
256.15
264.45
264.02
273.81
248.85
270.48
253.45
263.31
243.40
243.63
280.03
273.66
332.75
360.64
323.00
298.77
307.19
291.80
259.44
283.36
284.65
299.54
311.75
292.72
301.61
297.31
302.08
316.78
351.61
165.50
119.50
106.00
119.00
113.50
107.00
122.00
92.00
93.00
109.00
133.50
133.50
168.50
218.50
246.50
228.00
257.50
268.50
265.50
275.50
250.50
272.50
255.50
265.00
245.00
245.00
280.50
274.50
332.50
360.50
323.50
299.50
307.50
292.00
259.50
283.50
285.00
299.50
311.50
292.00
301.00
296.50
301.50
316.50
351.50
117.58
76.71
63.95
75.58
70.57
67.95
79.66
54.43
55.23
69.24
89.80
88.90
120.57
169.12
195.23
179.11
207.92
215.94
215.44
224.99
200.49
221.51
204.74
214.36
194.79
194.97
230.73
224.37
283.12
310.94
273.31
249.10
257.47
242.12
209.93
233.69
234.92
249.77
261.97
242.94
251.82
247.49
252.23
266.91
301.73
117.61
76.77
64.03
75.65
70.64
68.02
79.72
54.51
55.30
69.30
89.84
88.94
120.57
169.09
195.20
179.08
207.88
215.90
215.41
224.95
200.46
221.48
204.70
214.33
194.76
194.94
230.71
224.34
283.10
310.93
273.30
249.08
257.46
242.11
209.91
233.68
234.91
249.76
261.96
242.94
251.82
247.49
252.23
266.91
301.73
127.00
87.00
75.00
86.50
81.00
74.50
87.00
62.00
62.50
75.50
96.00
96.50
127.00
173.50
201.00
182.50
210.00
221.00
218.00
227.50
203.50
224.50
208.00
217.50
198.00
198.00
232.00
226.00
283.50
311.00
274.00
250.00
258.50
243.00
211.00
234.50
235.50
250.00
261.50
242.50
251.00
247.00
251.50
266.50
301.50
4.23
1.37
0.86
1.24
1.01
0.89
1.19
0.45
0.44
0.75
1.40
1.22
2.73
7.12
10.74
8.07
11.94
13.15
12.74
14.34
9.54
12.33
9.11
10.39
7.16
6.95
11.75
10.22
24.25
33.84
20.15
12.65
14.06
10.42
5.30
8.18
7.23
9.27
11.20
7.27
8.28
6.24
5.58
7.35
13.19
4.19
1.33
0.82
1.20
0.97
0.86
1.15
0.42
0.42
0.71
1.36
1.18
2.69
7.10
10.74
8.05
11.94
13.16
12.74
14.36
9.53
12.34
9.10
10.39
7.15
6.93
11.76
10.22
24.30
33.92
20.19
12.67
14.08
10.43
5.28
8.18
7.23
9.27
11.21
7.26
8.28
6.23
5.57
7.36
13.22
7.50 2.26 2.22 5.00

3.00 0.66 0.62 2.00
2.00 0.39 0.37 1.00
3.00 0.58 0.55 1.50
2.50 0.47 0.44 1.50
1.50 0.41 0.38 0.50
2.00 0.55 0.52 1.00
0.50 0.19 0.17 0.50
0.50 0.18 0.17 0.50
1.00 0.32 0.30 0.50
2.00 0.64 0.61 1.00
2.00 0.54 0.51 1.00
4.50 1.29 1.25 2.00
10.50 3.70 3.66 5.50
18.50 5.81 5.78 12.00
11.50 4.21 4.17 6.00
16.00 6.42 6.39 9.50
18.50 7.12 7.09 11.00
17.00 6.83 6.80 10.00
19.00 7.77 7.75 11.00
12.50 4.88 4.85 7.50
19.00 6.41 6.38 11.50
14.00 4.53 4.49 8.50
16.50 5.22 5.19 9.50
12.00 3.41 3.37 6.50
12.00 3.27 3.23 7.00
19.00 5.80 5.77 10.50
16.00 4.90 4.88 9.00
35.50 13.13 13.14 22.50
41.50 19.22 19.26 25.50
27.00 10.45 10.45 16.00
18.50 5.95 5.93 10.00
20.00 6.67 6.65 11.00
18.50 4.66 4.64 10.50
10.50 2.11 2.08 5.00
15.00 3.44 3.42 8.00
13.50 2.87 2.84 7.00
14.50 3.78 3.75 7.00
16.50 4.65 4.63 8.00
11.00 2.75 2.72 5.00
11.50 3.15 3.13 5.00
8.50 2.13 2.10 3.50
6.50 1.73 1.70 2.00
8.00 2.35 2.32 3.00
14.00 4.42 4.41 5.50
APPENDIX XIII
A call option will be referred to as in-the-money (ITM), or out-of-the-money (OTM)
if the strike price is less than, or greater than the forward price on the underlying
asset.
Unit of Trading: One option normally equals rights over 1000 shares
BSM denotes Black-Scholes model and ABSM Bias-Adjusted Black-Scholes

model.

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i

study examines equity options from thirteen different companies listed in

Hull and White (1987)

Such evidences have triggered profound interest in

Data and Methodology

used to in estimating the historical volatility.

Bias-Adjusted Black-Scholes model

The Newton-Raphson iterative method

Where f ( x n ) the option price at x n the approximated volatility, and f ( xn ) is

where t is iidN (0, 2 ) .

Here = ( 1) and here it is tested if is equal to zero. Pt is a random walk if is

for each is:

the null hypothesis that Pt is a random walk can be rejected if calculated

is similar to the estimation of t-statistic

is greater than the tabulated .

i is the error term.

Implied volatility estimates are

Summary and Conclusion

Note: Volatility set 1and set 2 is calculated using sample size

For Option in The First Set of Volatilities

(B) For Option in The Second Set of Volatilities

Bsm3 absm3 True3 Bsm4 absm4 True4

99.67 100.50 29.75 29.82 29.50 12.67

Deep OTM (650)

Bsm3 absm3 True3 Bsm4 absm4 True4

122.50 89.16 89.16 89.50 28.12 28.18 29.00

Deep OTM (1000)

Bsm3 absm3 True3 Bsm4 absm4 True4

Bsm3 absm3 True3 Bsm4 absm4 True4

Deep OTM (950)

Bsm3 absm3 True3 Bsm4 absm4 True4

Deep OTM (950)

Bsm3 absm3 True3 Bsm4 absm4 True4

Deep OTM (1150)

Bsm3 absm3 True3 Bsm4 absm4 True4

16.50 7.84 7.81 9.50

142.00 8.73 8.69 16.50

Deep OTM (1150)

Bsm3 absm3 True3 Bsm4 absm4 True4

7.50 2.26 2.22 5.00

BSM denotes Black-Scholes model and ABSM Bias-Adjusted Black-Scholes

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