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Valuing the quality option in agricultural commodity futures: a Monte Carlo simulation based approach

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  • Sanjay Mansabdar
  • Hussain C Yaganti

Abstract

Agricultural commodity futures are often settled by delivery. Quality options that allow the futures short to deliver one of several underlying assets are commonly used in such contracts to prevent manipulation. Inclusion of these options reduces the price of the futures contract and leads to degraded contract hedging performance. Valuation of these options is a first step in assessing the impact of the quality options embedded into a futures contract. This paper demonstrates a Monte Carlo simulation based approach to estimate the value of a quality option. In order to improve simulation efficiency, the technique of antithetic variables is used. This approach can help in the assessment of the impact of embedded quality options.

Suggested Citation

  • Sanjay Mansabdar & Hussain C Yaganti, 2020. "Valuing the quality option in agricultural commodity futures: a Monte Carlo simulation based approach," Papers 2006.11222, arXiv.org.
    • Handle: RePEc:arx:papers:2006.11222
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    References listed on IDEAS

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    Cited by:

    1. Fernandes, Vitor M. & Kunda, Eugene L. & Robe, Michel A., 2022. "Corn Futures Deliveries: Why? When? So What?," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322061, Agricultural and Applied Economics Association.

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