Option pricing in NSE
The primary objectives of this study were to establish the value of option pricing in the Nairobi Securities Exchange (NSE) using Black and Scholes pricing models. All the NSE 20 share index listedcompanies in the Nairobi Securities Exchange are the primary units of analysis for the study. Secondary data from NSE of these companies was vital for the analysis and evaluation. The values of Options were to be determined by first establishing the expected returns, level of volatility of stock for the period 2011 to 2014 and range of exercise prices. The expected returns of stocks declined from 2011 to 2013 and then stabilized in 2014.This observation was triggered by the external environment in which elections were being held in 2012 which affected the performance of stocks in the NSE.High inflation and high interest rates affected the stocks negatively. Most stocks posted significant volatilities and exercise ranges which would give investors an advantage to hedge against such movements. The exercise ranges computed were in tandem with share prices and therefore proved reasonable to use the data in managing risk. The volatilities of Black and Scholes model proved to work in the Kenyan market where stocks from NSE 20 share index were used in depicting European option prices. The calculations proved to be simple and accurate in observing price movements and hedging against the risks associated with. The study is an eye opener to investors wishing to make money in the stock market without necessarily worrying of stock movements. Investors would take advantage and reap profits when the stocks were high and at the same time when the stocks were low. . The study will play an integral role and create financial sense to numerous groups in the local financial markets sector. The NSE will be the greatest beneficiary since stock market attracts more public attention than other financial markets, such as bond and commodity thus giving a means of pricing option in the Kenyan derivative market. Investors and financial managers will benefit by having alternative ways of controlling risks by hedging through options. Lastly, different scholars and academicians from the institutions of higher learning will have an opportunity to extend their role in advancement of option pricing and development of platforms for option trading.