An Application of Taguchi L9 Method in Black Scholes Model for European Call Option

Abstract

The Black Scholes Model (BSM) is an important tool in financial economics in order to measures the option price at some future date at some strike price. This study is based on the Design of experiment on option pricing model at one period. DOE is a set of relations between the inputs and outputs variables. The Taguchi’s orthogonal array design is based on a mathematical model of factorial designs developed by R.C. Boss. This study is based on an application of Taguchi orthogonal array L9, in which the four parameters of BSM for European call option, is varied at three different levels. The aim of the experimental is to get the maximum realistic information. The four parameters of BSM at one period are; the underlying asset priceS_0, the strike price K, the interest rate r and the volatility σ. The main aim of this study are: a) To determine which parameter affects more or less on European call option using BSM at one period, b) the percentage contribution of each parameter and c) it discusses the section of the parameters for obtaining the best combination d) and whether the value of a call option follows a certain distribution. The different statistical tool is being used in this paper that are ANOVA, ANOM, Signal-to-Noise (S/N) ratio and Tukey Method.

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