Question

Discuss the other relevant alternatives of the BSM approach on the Stock Market of Market

Answer 1

Answer:

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Explanation:

Answer 2

The option-pricing model developed by Black, Scholes and Merton (BSM) in 1973 offers a "straightforward" way of "computing" the option contracts' prices,  and being widely used by traders.

Explanation:

Alternatives of the BSM approach on the Stock Market of Market.

• The BSM analysis could be applied to "contingent claims" – securities which have returns that are dependent on the "returns of other assets". The ""contingent claims" analysis is associated with finding such a relationship & utilising it to ascertain the contingent claim price. This is the same reasoning that is "applied" in the BSM model.
• Another significant applications of the BSM approach to “option-like” securities is pricing of "insurance contracts" like "deposit insurance policies" & "loan guarantees". The strategy of acquiring a put option on an asset as well as the asset is viewed as an "insurance policy" against "losses" which would stem from a "decline" in the asset price. Likewise loan guarantees & deposit insurance protect against loses resulting in the case of default . The insurance firm writes a "put option" which provides its holder with the "right" however,  not the "obligation" to sell the "underlying asset"; likewise, the "deposit" made with a bank wherein the "deposit holder" wants to "protect" himself/herself in case the bank defaults – and the "loan issued" – where a "bank" holds the "option" on the loan & will exercise it if the borrower "defaults on the payments". BSM formula can be adopted to price the"insurance contracts".
• Yet another application of the BSM analysis is in revolving credit agreements/ line of credit agreements, that are contracts similar to options that is, a firm that needs finance for its projects "signs an agreement" with another firm who is "obliged" to lend/loan to it the amount required in case this is asked for/requested. The company that holds this call option decides on the cost of the borrowing imposed by other banks to borrow at the lowest possible rate. The analytical framework of the BSM model has been used by Hawkins (1982) in estimating the prices of revolving credit agreements.

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