Evaluating the Black-Scholes Model for Pricing Nigerian Exchange Call Options:  Addressing Cost of Carry Bias

C. A. Onyegbuchulem; B. O. Onyegbuchulem,; P. C. Achugamuonu

C. A. Onyegbuchulem Department of Mathematics, Alvan Ikoku Federal University of Education, Owerri, Imo State.
B. O. Onyegbuchulem, Department of Statistics, Imo State Polytechnic, Omuma, Imo State
P. C. Achugamuonu Department of Mathematics, Alvan Ikoku Federal University of Education, Owerri, Imo State.

Abstract

This study examines the Black-Scholes model and its limitations in accurately pricing call options
on five Nigerian stocks listed on the Nigerian Exchange. The model shows systematic pricing
errors, with calculated prices differing from market prices. Observations were made that future
prices are traded at a discount to spot prices, causing a negative cost of carry bias. To address this,
we replace the spot price (S) in the Black-Scholes model with the discounted value of the future
price (DVFP), as suggested by Black. Our results show that the original Black-Scholes model
produces significant pricing errors, but the modified model using DVFP shows improved accuracy.

Author Biographies

C. A. Onyegbuchulem, Department of Mathematics, Alvan Ikoku Federal University of Education, Owerri, Imo State.

Department of Mathematics, Alvan Ikoku Federal University of Education, Owerri, Imo State.

B. O. Onyegbuchulem,, Department of Statistics, Imo State Polytechnic, Omuma, Imo State

Department of Statistics, Imo State Polytechnic, Omuma, Imo State

P. C. Achugamuonu, Department of Mathematics, Alvan Ikoku Federal University of Education, Owerri, Imo State.

Department of Mathematics, Alvan Ikoku Federal University of Education, Owerri, Imo State.