Comparative Analysis of Options Pricing Models

Abstract

Global futures and options trading hit 28.9 billion contracts in the first half of 2021, up 32.1% from the same period in 2020. Open interest, which gauges the number of outstanding contracts at a certain period in time, increased this year as well, though not as quickly as last year. At the end of June, total open interest was 1.08 billion contracts, up 11.6 percent from June 2020. Fisher Black and Scholes (1973) revolutionized the world of options by proposing the widely used FSM valuation model for American options, which was improved upon by Robert Jarrow and Andrew Judd (1982) for European options valuation using arbitrary stochastic processes, and further, numerical techniques based on Binomial trees have been developed. There is currently no literature that details the accuracy of these pricing models across a variety of market conditions - bear, bull, and stable markets, which are a marker of the COVID-19 impact on global markets, and options markets by extension - due to the various types of options pricing methods available.