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Pricing and Hedging of Long-term Futures and Forward Contracts by a Three-Factor Model ( Revised in December 2007; Subsequently published in "Quantitative Finance". )

Author

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  • Kenichiro Shiraya

    (Mizuho-DL Financial Technology Co., Ltd.)

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

Abstract

This paper proposes a new three-factor model with stochastic mean reversions for commodity prices and derives the closed-form solution for the term structure of futures prices. Moreover, it confirms that the prices of crude oil and copper futures prices estimated by our model replicate the observed ones very well. Finally, detailed performance analysis of hedging illiquid long-term futures and forwards with liquid short and medium-term futures shows the validity of our method.

Suggested Citation

  • Kenichiro Shiraya & Akihiko Takahashi, 2007. "Pricing and Hedging of Long-term Futures and Forward Contracts by a Three-Factor Model ( Revised in December 2007; Subsequently published in "Quantitative Finance". )," CARF F-Series CARF-F-113, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  • Handle: RePEc:cfi:fseres:cf113
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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/115.pdf
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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. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
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