The Black-scholes Option Pricing Model Experiment Of Chinese Stock Combination As Simulated Underlying Asset

The issue of Chinese stock option will soon come into the market at the firsttime,officially. To use the mature European option estimate theory and to avoid thedisability of the model to these new Chinese financial market, it’s necessary to test theutility of the Black-Scholes model, the most widely used pricing theory, to theevaluation of the option price of the company who have the plan to issue or havealready issued the option which is in a trial simulated trade. However, it’s aformidable for Chinese researchers of the option pricing to do that test because of thescarcity of the Chinese option trading data.To solve this puzzle, in this paper we proposed that to build the similarity of theasset in two different market by doing the canonical correlation analysis, which cancreate two linear combination of two groups of stock assets as the simulated assets oftwo faked options in different markets.And the European faked option price can begot from the real trading data under the assumption of no-arbitrage theory. Therefore,just by adapting the Chinese stock combination assets to variety of extensively usedEuropean option pricing theories like the Monte Carlo simulation, the finite differencemethod to solve the Black-Scholes partial differential equation, the binary tree method,or the Implied Volatility function method which can do great help to deal with thepuzzled financial phenomenon of volatility skew. Plus, this paper will try to add theestimation of volatility by the ARMA model and the prediction of the series of thevolatility by the GARCH model to the option pricing methods which are mentionedabove. To be more specifically,use the ARMA estimation of the volatility as theparameter in those option pricing method and make the predicted volatility series asthe parameter following the node of the division in numeric methods.Within thesefive methods,the answer to the question whether the Chinese financial informationcan adapt the model of European option pricing method, and if the Black-Scholesmodel is useful in Chinese financial market to evaluate the option, will be given bythe comparison analysis in the last part Moreover, even if there is no method in thispaper can make these two markets’ financial derivatives fits their targets, there wouldalso be profitable by comparing the different pricing method to make the answer tothe question which method can avoid producing the gap between the pricing of thesetwo combination’s respective faked options, except for their assets distinction.