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Valuation of commodity derivatives in a new multi-factor model

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  • Xuemin Yan

Abstract

This paper extends existing commodity valuation models to allow for stochastic volatility and simultaneous jumps in the spot price and spot volatility. Closed-form valuation formulas for forwards, futures, futures options, geometric Asian options and commodity-linked bonds are obtained using the Heston (1993) and Bakshi and Madan (2000) methodology. Stochastic volatility and jumps do not affect the futures price at a given point in time. However, numerical examples indicate that they play important roles in pricing options on futures. Copyright Kluwer Academic Publishers 2002

Suggested Citation

  • Xuemin Yan, 2002. "Valuation of commodity derivatives in a new multi-factor model," Review of Derivatives Research, Springer, vol. 5(3), pages 251-271, October.
    • Handle: RePEc:kap:revdev:v:5:y:2002:i:3:p:251-271
    DOI: 10.1023/A:1020871616158
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    References listed on IDEAS

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    Cited by:

    1. Zonggang Ma & Chaoqun Ma & Zhijian Wu, 2022. "Pricing commodity-linked bonds with stochastic convenience yield, interest rate and counterparty credit risk: application of Mellin transform methods," Review of Derivatives Research, Springer, vol. 25(1), pages 47-91, April.
    2. Wu, Yang-Che & Chung, San-Lin, 2010. "Catastrophe risk management with counterparty risk using alternative instruments," Insurance: Mathematics and Economics, Elsevier, vol. 47(2), pages 234-245, October.
    3. Delphine Lautier & Alain Galli, 2010. "Dynamic hedging strategies: an application to the crude oil market," Post-Print halshs-00640802, HAL.
    4. Moreno, Manuel & Novales, Alfonso & Platania, Federico, 2019. "Long-term swings and seasonality in energy markets," European Journal of Operational Research, Elsevier, vol. 279(3), pages 1011-1023.
    5. Cortazar, Gonzalo & Lopez, Matias & Naranjo, Lorenzo, 2017. "A multifactor stochastic volatility model of commodity prices," Energy Economics, Elsevier, vol. 67(C), pages 182-201.
    6. Gonzato, Luca & Sgarra, Carlo, 2021. "Self-exciting jumps in the oil market: Bayesian estimation and dynamic hedging," Energy Economics, Elsevier, vol. 99(C).
    7. Gong, Xiaoye & Li, Ying & Wu, Yang-Che & Yang, Wan-Shiou, 2020. "Pricing various types of mortgage insurances with disposal and discount costs under a mean-reverting Lévy housing price process," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 551(C).
    8. Lourdes Gómez-Valle & Julia Martínez-Rodríguez, 2021. "Including Jumps in the Stochastic Valuation of Freight Derivatives," Mathematics, MDPI, vol. 9(2), pages 1-17, January.
    9. Chih-Chen Hsu & An-Sing Chen & Shih-Kuei Lin & Ting-Fu Chen, 2017. "The affine styled-facts price dynamics for the natural gas: evidence from daily returns and option prices," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 819-848, April.
    10. Max F. Schöne & Stefan Spinler, 2017. "A four-factor stochastic volatility model of commodity prices," Review of Derivatives Research, Springer, vol. 20(2), pages 135-165, July.
    11. repec:dau:papers:123456789/5470 is not listed on IDEAS
    12. Rodriguez, J.C., 2007. "A Preference-Free Formula to Value Commodity Derivatives," Other publications TiSEM 7354a9fa-3202-40c1-aeb2-a, Tilburg University, School of Economics and Management.
    13. Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 273-290.
    14. Gareth W. Peters & Mark Briers & Pavel V. Shevchenko & Arnaud Doucet, 2011. "Calibration and filtering for multi factor commodity models with seasonality: incorporating panel data from futures contracts," Papers 1105.5850, arXiv.org.
    15. repec:dau:papers:123456789/95 is not listed on IDEAS
    16. Fileccia, Gaetano & Sgarra, Carlo, 2018. "A particle filtering approach to oil futures price calibration and forecasting," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 21-34.
    17. Gareth William Peters & Mark Briers & Pavel Shevchenko & Arnaud Doucet, 2013. "Calibration and Filtering for Multi Factor Commodity Models with Seasonality: Incorporating Panel Data from Futures Contracts," Methodology and Computing in Applied Probability, Springer, vol. 15(4), pages 841-874, December.
    18. Chou-Wen Wang & Ting-Yi Wu, 2007. "An Alternative Formulation for the Pricing of Stock Index Futures: Theoretical and Empirical Perspectives," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 6(2), pages 121-134, August.
    19. Roncoroni, Andrea & Prokopczuk, Marcel & Ronn, Ehud I., 2018. "Introduction—special issue on commodity and energy markets in the Journal of Banking and Finance," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 1-4.
    20. Crosby, John & Frau, Carme, 2022. "Jumps in commodity prices: New approaches for pricing plain vanilla options," Energy Economics, Elsevier, vol. 114(C).
    21. Rodriguez, J.C., 2007. "A Preference-Free Formula to Value Commodity Derivatives," Discussion Paper 2007-92, Tilburg University, Center for Economic Research.
    22. Anh Ngoc Lai & Constantin Mellios, 2016. "Valuation of commodity derivatives with an unobservable convenience yield," Post-Print halshs-01183166, HAL.

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