Question

Critically assess the advantages of the Black Scholes Pricing Model on the Stock Exchange of Mauritius.

Answer 1

Here the critical assessment of black scholes model in Mauritius stock exchange.

1. The model assumes that price a log normal distribution which is not correct because there is latge up and down swing in prices.

2. The model says that risk free rate ia ia constant over the life of option. This is wrong as it keeps on changing.

3. Volatility according to this model is always constant, this is inturn false as volatility keeps on changing over the life.

4. The model ignore the brokerage charges, which is applicable in Mauritius stock exchange.

5. The model says that there is no early exercise of options while many traders early exercise thiee options.