Option Pricing on Renewable Commodity Markets
AbstractOptions markets on agricultural commodities with maturities that exceed 13 months seldom trade. Our hypothesis is that this market failure is due to the absence of an accurate option pricing model for commodities where mean reversion can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities where supply response works to bring prices back to production costs. The model suggests that traditional option pricing models will overprice long-term options on these markets.
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Bibliographic InfoPaper provided by Agricultural and Applied Economics Association in its series 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado with number 60955.
Date of creation: 2010
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commodity futures and option; price mean reverting; seasonality; Agricultural Finance; Financial Economics;
Other versions of this item:
- Sergio H. Lence & Dermot J. Hayes, 2002. "Option Pricing on Renewable Commodity Markets," Center for Agricultural and Rural Development (CARD) Publications 02-wp309, Center for Agricultural and Rural Development (CARD) at Iowa State University.
- Lence, Sergio H. & Hayes, Dermot J., 2002. "Option Pricing On Renewable Commodity Markets," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19053, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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- Bessembinder, Hendrik, et al, 1995. " Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure," Journal of Finance, American Finance Association, vol. 50(1), pages 361-75, March.
- Bryan Routledge & Duane Seppi & Chester Spatt, .
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GSIA Working Papers
1997-49, Carnegie Mellon University, Tepper School of Business.
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