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| Efficiency of the Black-Scholes Option Pricing Model in the Pricing of Palm-Oil Futures in Nigeria’s Physical Market. |
Dr. Okaro, Celestine Sunday Ogonna, Okeke, Chukwunonso Kingsley, Dr. Uzondu, Chikodiri Scholastica
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Abstract:
This study tested the efficiency of the Black-Scholes Options model for suitability in determining contract prices of palm-oil futures in Nigeria’s physical market. The effects of the constant volatility and efficient market assumptions of the model was examined for a seasonal commodity in an unstructured market as recommended in recent literatures reviewed, on the model’s effectiveness. The study used primary sample data from an over- the- counter, palm-oil physical market in Nkwo-Nnewi, Anambra State, Nigeria. The approach involved generating the model’s implied contract prices using historical prices of the commodity at the seasonal peak and dip periods for ten years. These contract prices were compared with the assessed unit profit/loss margins of the same historical periods and correlated with Pearson’s Coefficient. Findings showed a fairly strong positive and significant correlation between the generated contract prices and the actual historical margins. The study concluded that the model is suitable to be employed as a base for pricing unstructured over-the-counter seasonal commodity contracts and recommended that seasonality adjustments and increased stochastic factors should be included to the model for more accurate pricing and application in Nigeria’s physical market
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