Current Developments and Limitations for Pricing Options

Abstract

Valuing options holds significant importance within the derivative market, serving as a cornerstone for investors, traders, and financial institutions. Over time, economists have dedicated efforts to develop models that accurately reflect the complexities of this market environment. The evolution of economic theories can be observed through the examination of key option pricing models, which have undergone refinements and enhancements over the decades. By exploring models such as the Black-Scholes model, the Merton model, and the Cox-Ross-Rubinstein model, it is possible to gain valuable insights into the progression of economic thought in this field. Each of these models offers unique perspectives on option pricing, illustrating various principles and methodologies employed to assess and value options. Moreover, understanding the extensions and limitations of these models provides crucial insights into their applicability and effectiveness in real-world scenarios. By conducting an in-depth examination of these models, the objective of this article is to offer a nuanced comprehension of how economic theories have developed and adjusted to the ever-changing conditions of the derivative market.