Pricing of derivatives on commodity indices

Rauch, J.; Krayzler, Mikhail; Brunner, Bernhard; Zagst, Rudi

doi:10.1016/j.irfa.2013.02.006

“…However, they do not derive an explicit expression for the price of an option in their model. Rauch et al (2013) discuss the issue of volatility and mean reversion in the pricing of commodity derivatives and calibrate their model to market data from a range of commodities. However, in difference to our paper, they work with constant convenience yield and the assumption that volatility is a function of the commodity price only and not affected by exogenous shocks.…”

Section: Introductionmentioning

confidence: 99%

Pricing commodity futures options in the Schwartz multi factor model with stochastic volatility: An asymptotic method

Chen

¹

,

Ewald

²

2017

International Review of Financial Analysis

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In this paper we investigate the applicability of the asymptotic approach developed in Fouque et al. (2000) for pricing commodity futures options in a Schwartz (1997) multi factor model, featuring both stochastic convenience yield and stochastic volatility. We show that the zero order term in the expansion coincides with the Schwartz (1997) two factor term, with expected long-term volatility replacing the constant volatility term, and provide an explicit expression for the first order correction term. Using empirical data from the natural gas futures market, we demonstrate that a significantly better calibration can be achieved by involving the correction term as compared to the standard Schwartz (1997) two factor expression. This improvement comes at virtually no extra effort.

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Uncertain energy model for electricity and gas futures with application in spark-spread option price

Mehrdoust

¹

,

Noorani

²

,

Xu

³

2022

Fuzzy Optim Decis Making

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Pricing Commodity Futures Options in the Schwartz Multi Factor Model with Stochastic Volatility: An Asymptotic Method

Chen

¹

,

Ewald

²

2016

SSRN Journal

0

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In this paper we investigate the applicability of the asymptotic approach developed in Fouque et al. (2000) for pricing commodity futures options in a Schwartz (1997) multi factor model, featuring both stochastic convenience yield and stochastic volatility. We show that the zero order term in the expansion coincides with the Schwartz (1997) two factor term, with expected long-term volatility replacing the constant volatility term, and provide an explicit expression for the first order correction term. Using empirical data from the natural gas futures market, we demonstrate that a significantly better calibration can be achieved by involving the correction term as compared to the standard Schwartz (1997) two factor expression. This improvement comes at virtually no extra effort.

show abstract

Pricing of derivatives on commodity indices

Cited by 4 publications

References 14 publications

Pricing commodity futures options in the Schwartz multi factor model with stochastic volatility: An asymptotic method

Pricing commodity futures options in the Schwartz multi factor model with stochastic volatility: An asymptotic method

Uncertain energy model for electricity and gas futures with application in spark-spread option price

Pricing Commodity Futures Options in the Schwartz Multi Factor Model with Stochastic Volatility: An Asymptotic Method

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