Valuing Energy Options in a One Factor Model Fitted to Forward Prices
In this paper we develop a single-factor modeling framework which is consistent with market observable forward prices and volatilities. The model is a special case of the multi-factor model developed in Clewlow and Stickland [1999b] and leads to analytical pricing formula for standard options, caps, floors, collars and swaptions. We also show how American style and exotic energy derivatives can be priced using trinomial trees, which are constructed to be consistent with the forward curve and volatility structure. We demonstrate the application of the trinomial tree to the pricing of a European and American Asian option. The analysis in this paper extends the results in Schwartz  and Amin, et al. .
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World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 14, pages 307-326
World Scientific Publishing Co. Pte. Ltd..
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