How, Why, and When the Current Real Market Crude-oil Price Differs from the Theoretical Price by the Black-Scholes Model

Abstract

Real-life crude oil pricing does not strictly follow the traditional and authoritative Black-Scholes pricing model in many cases. In fact, the Black-Scholes model has its own limitations and is challenged every now and then. How the prices derived from the Black-Scholes model really differ from or are similar to the actual market prices and what the causes of the difference between theory and reality are (factors that are remarkably affecting real-world oil pricing) will be explored in this research. This research analyzes the global oil pricing market and studies concrete cases from the CME Group, India NSE stocks, etc. The case study shows the situations when the Black-Scholes model is applicable and not applicable in real market pricing, which leads to the discussion of what actually deviates oil prices from the Black-Scholes model at the global level. This discussion is greatly dependent on the summary of oil prices and relevant events during the past decades.