AI in Derivatives Market in India

Abstract

This paper investigates the application of Artificial Intelligence (AI) in pricing and valuing derivatives in India’s financial markets. While AI is being widely used in global markets for various purposes, very few research papers focus specifically on its application in India's derivatives segment, creating a significant research gap. This paper discusses in detail how AI can be integrated into different pricing and valuation models such as the Black-Scholes model, Monte Carlo simulation, sentiment analysis, and machine learning methods, as well as in risk management, to enhance both accuracy and speed.

Traditional models like Black-Scholes, though well-established, face certain limitations in practical scenarios, especially under volatile market conditions. AI has the ability to overcome these constraints by providing faster, more adaptive, and more precise results, based on real-time data processing and advanced pattern recognition. Monte Carlo simulation, when enhanced with AI algorithms, can handle complex datasets more efficiently, while sentiment analysis powered by AI can assess market mood and its impact on pricing.