Generic Price Model for Commodity Derivatives

Lee, David (2022): Generic Price Model for Commodity Derivatives.

Abstract

This article develops a new framework for modeling the dynamics of commodity forward curves and pricing commodity derivatives. The model accommodates a generic calibration procedure to ensure that the model prices for vanilla options match exactly the market prices. Empirically we show that the model prices are within the bid-offer spreads, indicating prima facie that the model performs quite well. We also show that the model prices for non-vanilla options are in good agreement with the market prices and the implied model dynamics are in good agreement with the characteristics of the historical data series.

• Item Type: MPRA Paper
• Language: English
• Keywords: commodity derivatives, multiple factor model, model calibration, volatility skew
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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