A Volatility Based Modified Black Scholes Approach to Price Options

Abstract The goal of the project was to improve the Black Scholes model accuracy in pricing options at higher values of volatility. The market is constantly overwhelmed with uncertainty, within lies the potential of an asset's price to rise or fall significantly. This brings about the concept that the market moves stochastically that is randomly. This variability of the market is quantified as the term, volatility. Using the volatility values, stochastic asset models can be formed, which are capable of finding the values of assets in the future. One of the most prominent stochastic asset models is the Black Scholes option pricing model. Formulated by Fischer Black and Merton Scholes, this option pricing model is the most widely utilized model in the market. Through a series of random value testing, the volatility was found to be the most significant factor in the Black Scholes model. In conclusion, a basic computer simulation model was developed, using the Black Scholes model to price options.