A STUDY OF OPTION PRICING MODELS WITH DISTINCT INTEREST RATE

This paper analyses the effect of different interest rates on two Option Pricing Models, Black-Scholes', and Heston. Here, the parameter interest rate is focused, and a comparison is done amongst the two models. An error estimator, UMBRAE (Unscaled Mean Bounded Relative Absolute Error) is calculated for pricing various European call options. The real market data is collected from NSE (National Stock Exchange). Moneyness (percentage difference of stock price and strike price) and Time-To-Maturity are used as the base for comparison. All the mathematical calculation is done in MATAB software. We observe that Black-Scholes' model is preferred for lower interest rates than Heston options pricing model and vice-versa. This study is helpful in derivatives market.