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Analytically pricing commodity futures options in a regime-switching financialization framework

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  • Chen, Wenting
  • Huo, Zhongyao
  • He, Xin-Jiang

Abstract

This paper develops an advanced pricing model for commodity futures options, overcoming the limitations of traditional models in the context of increasing commodity financialization. The model incorporates a stochastic financialization discount factor to directly measure the impact of financialization and a regime-switching mechanism for macroeconomic economic shifts. Despite the model’s inherent mathematical complexity, we have managed to derive a semi-closed-form solution that enables efficient model calibration. Empirical results show that the current model outperforms several existing models, implying that the present model, along with the newly derived formula, can be confidently utilized in real commodity market.

Suggested Citation

  • Chen, Wenting & Huo, Zhongyao & He, Xin-Jiang, 2025. "Analytically pricing commodity futures options in a regime-switching financialization framework," Finance Research Letters, Elsevier, vol. 85(PE).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pe:s1544612325015004
    DOI: 10.1016/j.frl.2025.108246
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    References listed on IDEAS

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