4. Theses

The option pricing model introduced by Black-Scholes in 1974 gained wide acceptance for its simplicity but was inefficient in pricing options as it relied on implied volatility. Despite the evolution of various versions of option pricing models since their seminal work, little progress had been documented on the use of implied volatility, leaving Black-Scholes to be a mathematical identity to calculate the instantaneous implied volatility as it fails to be an efficient pricing equation. Although interpreted as market expectation of future volatility of stocks, implied volatility is literally a black box that captures market information that is not specifically known yet also internally inconsistent (e.g., having a different implied volatility surface for put and call options). The four main objectives of this thesis are: first, to empirically studying the performance of the Oscillator model developed by Baaquie (2019) and examining its efficiency in pricing options as compared to Black-Scholes model. The Oscillator model has only two sets of parameters in addition to the classical form of Black-Scholes; one to model for the underlying stochastic evolution of the stock price, and the second are of market time. Market time is a behavioural parameter introduced by Baaquie and Bouchaud (2004) which scales the time to maturity to capture the market sentiment of the underlying instrument. This thesis also introduced an alternative version of Black-Scholes by adjusting it for market time. Second, the thesis tested the put-call parity violation. Third, the thesis tested three main option hedging Greeks; Delta, Gamma, and Theta, which are partial differentiations of the option pricing equation. Fourth, the thesis discussed the calibrated output and parameters' behaviour to provide insights into the implied volatility information content and gain new understanding of the parametric gap of Black-Scholes particularly in the light of the Oscillator and Black-Scholes models adjusted for market time.

Infrastructure is the backbone of modem economies; an adequate and efficient public infrastructure is essential for nations to achieve their economic growth objectives. Although the need and role of infrastructure are well recognized, little attention has been paid to the risks and pitfalls of the current infrastructure financing structures. The enormous infrastructure deficit and the increasing instances of debt restructurings, infrastructure project failures and expensive government bailouts, present enough reason for a deeper thought and action towards making infrastructure financing more robust. Through the thesis, the researcher sheds light on the problems related to such forms of financings and presents the case for an alternative model to finance infrastructure developments. The objective is to structure instruments based on Islamic risk-sharing principles and evaluate their efficacy to finance infrastructure projects. To test the viability of such instruments, we use the case study approach, whereby the cases of the Euro Tunnel and the Taiwan High Speed Rail have been simulated and backtested, to demonstrate how fortunes of these projects would have been different considering the use of the proposed instruments instead of conventional interest-bearing debt. The findings of the cash flow remodel are positive for both the cases and the introduction of the proposed instrument within the two project capital structures adds robustness to the projects. Moreover, the risk adjusted returns for investors tends to be higher in comparison to the conventional infrastructure financing structures. The findings provide a strong argument towards the use of lesser leverage for infrastructure financing and the use of risk-sharing instruments by governments to develop infrastructure. The proposed instrument while providing stability to infrastructure projects and economic benefits to its investors, is Shariah compliant or in line with the tenets of Islamic law and thus can be used by Shariah conscious investors to generate superior returns and by policy makers to further build the Islamic capital markets.