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Black to Negative: Embedded optionalities in commodities markets

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  • Richard J. Martin
  • Aldous Birchall

Abstract

We address the modelling of commodities that are supposed to have positive price but, on account of a possible failure in the physical delivery mechanism, may turn out not to. This is done by explicitly incorporating a `delivery liability' option into the contract. As such it is a simple generalisation of the established Black model.

Suggested Citation

  • Richard J. Martin & Aldous Birchall, 2020. "Black to Negative: Embedded optionalities in commodities markets," Papers 2006.06076, arXiv.org, revised Oct 2020.
    • Handle: RePEc:arx:papers:2006.06076
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    References listed on IDEAS

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    1. Jaime Casassus & Pierre Collin‐Dufresne, 2005. "Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates," Journal of Finance, American Finance Association, vol. 60(5), pages 2283-2331, October.
    2. Gibson, Rajna & Schwartz, Eduardo S, 1990. "Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-976, July.
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    Cited by:

    1. Richard J. Martin, 2021. "Design and analysis of momentum trading strategies," Papers 2101.01006, arXiv.org, revised Jan 2023.

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