Impact of financial derivatives in Indian markets: A case of Black Scholes Merton Model Case Solution & Answer

Impact of financial derivatives in Indian markets: A case of Black Scholes Merton Model Case Solution

Importance of Black Scholes in financial markets

The model was established by Fischer Black, and Myron Scholes. It is a widely used financial tool, whose function is to minimize the risks of the currency as well as interest rates through use of pricing technique.

The model consists of four components, which are the main factors behind the performance of the option premiums or control. First is the pot price or in other words, the current prices. Which is subjected to practice in current situation. Second is the strike price, whose function is to fix the price level for future considerations in order to benefit and reduce the level of expected risk of inflation.

The other component is time maturity where the contract of option will be ended and practiced according to the expected price levels of both parties involved. The final component is the volatility of the price level, which is expected in fluctuating pricing results in the future and that can be the base line for every participant to critically evaluate importance of derivative instrument. The following formula is shown below:

P = Xe–rT N (–d2) – S0 N (-d1)

d1 = [Ln (S / X) + (r + σ2 / 2) X t] σ Öt

d2 = [Ln (S / X) + (r – σ 2 / 2) X t] σ Öt

Expected performance of an Indian industry through the use of the model (Ambuja Cement)

From the following analysis, it has been analysed that the prices of the industry is fluctuating in the Indian market. Which shows that the high volatility will increase the practice of the derivative functions over the exchange-traded and OTC market of India.

However, the analysis indicates that the value of put option for Ambuja cement will fluctuate according to the exercise and strike price due to changing market trends in the future. Therefore, from the following results, it is identified that the value will change accordingly. Due to up and down scenario of the emerging global market.

 The net results from the solution illustrates that the price range of profits will be directly proportional to the value of put option at the end of the period which also shows that, if the duration of the contract will increase then the overall profit will increase in the same margin as in the particular years.

 Whatever the current price of Ambuja (which is 200 strike price) will tend to increase due to the expected economic appreciations in future. The results are the only baseline of how certain changes in the rate will reflect the price level of a particular industry. So it is concluded, that Indian markets is still focusing on how to handle the level of expected risk through the use of these kinds of models and to provide greater benefits to the industry for expansion in future scenarios.


From the analysis, it can be concluded that the Indian markets are still hungry for use of derivative instruments due to high volatility of price fluctuations. Therefore, the use of derivative instruments is important to consider when controlling the emerging market. In India, it is determined that the market is still poor to control the price levels against the global impact of changes.

 However the importance of Black Scholes Merton model will allow to manage the price fluctuations under high volatility of ranges. The following analysis from the result of Ambuja cement shows that the industry will widen its expansion over financial perspective with the particular model to control the risk factor over inflation within the economy.

Finally, it is determined that this type of derivative practice will decrease price volatility in the emerging markets of the world and attract a number of corporate and financial institutions to practice the function in order to be beneficial and look for further expansion through the use of derivative instruments……………………

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