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Valuation of commodity derivatives in a new multi-factor model

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  • Xuemin Yan
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    Abstract

    This paper extends existing commodity valuation models to allow for stochastic volatility and simultaneous jumps in the spot price and spot volatility. Closed-form valuation formulas for forwards, futures, futures options, geometric Asian options and commodity-linked bonds are obtained using the Heston (1993) and Bakshi and Madan (2000) methodology. Stochastic volatility and jumps do not affect the futures price at a given point in time. However, numerical examples indicate that they play important roles in pricing options on futures. Copyright Kluwer Academic Publishers 2002

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    File URL: http://hdl.handle.net/10.1023/A:1020871616158
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    Bibliographic Info

    Article provided by Springer in its journal Review of Derivatives Research.

    Volume (Year): 5 (2002)
    Issue (Month): 3 (October)
    Pages: 251-271

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    Handle: RePEc:kap:revdev:v:5:y:2002:i:3:p:251-271

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    Web page: http://www.springerlink.com/link.asp?id=102989

    Related research

    Keywords: Asian options; commodity derivatives; random jumps; stochastic volatility;

    References

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    1. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
    2. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
    3. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    4. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 2000. "Pricing and hedging long-term options," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 277-318.
    5. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
    6. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
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    Cited by:
    1. Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 273-290.
    2. Delphine Lautier & Alain Galli, 2010. "Dynamic hedging strategies: an application to the crude oil market," Post-Print halshs-00640802, HAL.
    3. Rodriguez, J.C., 2007. "A Preference-Free Formula to Value Commodity Derivatives," Discussion Paper 2007-92, Tilburg University, Center for Economic Research.
    4. Chou-Wen Wang & Ting-Yi Wu, 2007. "An Alternative Formulation for the Pricing of Stock Index Futures: Theoretical and Empirical Perspectives," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 6(2), pages 121-134, August.
    5. Lautier, Delphine & Galli, Alain, 2010. "Dynamic Hedging Strategies: An Application to the Crude Oil Market," Economics Papers from University Paris Dauphine 123456789/5470, Paris Dauphine University.
    6. Wu, Yang-Che & Chung, San-Lin, 2010. "Catastrophe risk management with counterparty risk using alternative instruments," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 234-245, October.
    7. Lautier, Delphine, 2005. "Segmentation in the Crude Oil Futures Term Structure," Economics Papers from University Paris Dauphine 123456789/95, Paris Dauphine University.

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