Valuing Energy Options in a One Factor Model Fitted to Forward Prices
AbstractIn this paper we develop a single-factor modeling framework which is consistent with market observable forward prices and volatilities. The model is a special case of the multi-factor model developed in Clewlow and Stickland [1999b] and leads to analytical pricing formula for standard options, caps, floors, collars and swaptions. We also show how American style and exotic energy derivatives can be priced using trinomial trees, which are constructed to be consistent with the forward curve and volatility structure. We demonstrate the application of the trinomial tree to the pricing of a European and American Asian option. The analysis in this paper extends the results in Schwartz  and Amin, et al. .
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 10.
Date of creation: 01 Apr 1999
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