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Option Pricing with Shifted Lognormal Model for Negative Oil Prices

In: The CME Vulnerability The Impact of Negative Oil Futures Trading

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  • Henry Yang

Abstract

Fischer Black and Myron Scholes (1973) assumed asset prices follow lognormal distributions and derived the famous Black–Scholes option pricing formula. The lognormal assumption implies the asset price will never be negative and has zero as its lower bound. By relaxing the negative and zero bound, we derive a Black–Scholes-like option pricing formula for asset prices following a shifted lognormal distribution with a lower bound. The formula can be applied to price options with negative prices and negative strikes.

Suggested Citation

  • Henry Yang, 2020. "Option Pricing with Shifted Lognormal Model for Negative Oil Prices," World Scientific Book Chapters, in: George Xianzhi Yuan (ed.), The CME Vulnerability The Impact of Negative Oil Futures Trading, chapter 7, pages 147-153, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811223204_0007
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    More about this item

    Keywords

    CME; Vulnerability; WTI; Oil; Trading; Rule; 420; Negative Trading Price; Best Practice; Valuation; Risk Management; Regulatory; Rule; Accounting; Standard; Fair Value; Trading Behaviour; Covid; Corona;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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