Competency of Monte Carlo and Black–Scholes in pricing Nifty index options: A vis-à-vis study

Abstract

Abstract. This paper endeavors to evaluate the computational competency of Monte Carlo in option pricing. The paper compares the price effectiveness of four variants of Monte Carlo, namely variance reduction, Antithetic, IQ, and the Quasi-Monte Carlo, with the classical Black–Scholes model, for the most recent disturbed phase of the economy. To test the quality of variants of Monte Carlo and Black–Scholes this paper uses, as input to the model, three well-known techniques of implied volatility, at-the-money (ATM), volatility index (VIX) and parametric implied volatility (IV). This enables both objectives to be realized simultaneously, and sheds light on the forecasting capabilities of implied volatilities. The research shows that Monte Carlo with parametric implied volatility gives the best performance. Empirical tests show no significant difference between variants of Monte Carlo, nor any effect from the quality of the input parameters.