Advanced Search
MyIDEAS: Login to save this paper or follow this series

Pricing Options on Commodity Futures: The Role of Weather and Storage

Contents:

Author Info

  • Marin Bozic

    ()
    (The Institute of Economics, Zagreb)

Registered author(s):

    Abstract

    Options on agricultural futures are popular financial instruments used for agricultural price risk management and to speculate on future price movements. Poor performance of Black’s classical option pricing model has stimulated many researchers to introduce pricing models that are more consistent with observed option premiums. However, most models are motivated solely from the standpoint of the time series properties of futures prices and need for improvements in forecasting and hedging performance. In this paper I propose a novel arbitrage pricing model motivated from the economic theory of optimal storage and consistent with implications of plant physiology on the importance of weather stress. I introduce a pricing model for options on futures based on a generalized lambda distribution (GLD) that allows greater flexibility in higher moments of the expected terminal distribution of futures price. I use times and sales data for corn futures and options for the period 1995-2009 to estimate the implied skewness parameter separately for each trading day. An economic explanation is then presented for inter-year variations in implied skewness based on the theory of storage. After controlling for changes in planned acreage, I find a statistically significant negative relationship between ending stocks-to-use and implied skewness, as predicted by the theory of storage. Furthermore, intra-year dynamics of implied skewness reflect the fact that uncertainty in corn supply is resolved between late June and early October, i.e., during corn growth phases that encompass corn silking and grain maturity. Impacts of storage and weather on the distribution of terminal futures price jointly explain upward-sloping implied volatility curves.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.eizg.hr/Download.ashx?FileID=e04ee0aa-9ce9-445d-ae08-1450893f5638
    Download Restriction: no

    Bibliographic Info

    Paper provided by The Institute of Economics, Zagreb in its series Working Papers with number 1003.

    as in new window
    Length: 34 pages
    Date of creation: Dec 2010
    Date of revision:
    Publication status: Published in CPB document No 154
    Handle: RePEc:iez:wpaper:1003

    Contact details of provider:
    Postal: Trg J.F.Kennedy 7, HR - 10000 Zagreb
    Phone: (**385 1) 23 35 700
    Fax: (**385 1) 23 35 165
    Web page: http://www.eizg.hr
    More information through EDIRC

    Related research

    Keywords: arbitrage pricing model; options on futures; generalized lambda distribution; theory of storage; skewness;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:iez:wpaper:1003. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Doris Banicevic).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.