IDEAS home Printed from https://ideas.repec.org/p/uts/rpaper/261.html
   My bibliography  Save this paper

A Hybrid Commodity and Interest Rate

Author

Abstract

A joint model of commodity price and interest rate risk is constructed analogously to the multi-currency LIBOR Market Model (LMM). Going beyond a simple "re-interpretation" of the multi-currency LMM, issues arising in the application of the model to actual commodity market data are specifically addressed. Firstly, liquid market prices are only available for options on commodity futures, rather than forwards, thus the difference between forward and futures prices must be explicitly taken into account in the calibration. Secondly, we construct a procedure to achieve a consistent fit of the model to market data for interest options, commodity options and historically estimated correlations between interest rates and commodity prices. We illustrate the model by an application to real market data and derive pricing formulas for commodity spread options.

Suggested Citation

  • Kay Pilz & Erik Schlogl, 2009. "A Hybrid Commodity and Interest Rate," Research Paper Series 261, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:261
    as

    Download full text from publisher

    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp261.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Erik Schlögl, 2002. "A multicurrency extension of the lognormal interest rate Market Models," Finance and Stochastics, Springer, vol. 6(2), pages 173-196.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kay Pilz & Erik Schlogl, 2010. "Calibration of Multicurrency LIBOR Market Models," Research Paper Series 286, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Kovacevic, Raimund M. & Paraschiv, Florentina, 2012. "Medium-term Planning for Thermal Electricity Production," Working Papers on Finance 1220, University of St. Gallen, School of Finance.
    3. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2016. "Empirical Pricing Performance in Long-Dated Crude Oil Derivatives: Do Models with Stochastic Interest Rates Matter?," Research Paper Series 367, Quantitative Finance Research Centre, University of Technology, Sydney.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ting‐Pin Wu & Son‐Nan Chen, 2008. "Valuation of floating range notes in a LIBOR market model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(7), pages 697-710, July.
    2. Frank De Jong & Joost Driessen & Antoon Pelsser, 2001. "Libor Market Models versus Swap Market Models for Pricing Interest Rate Derivatives: An Empirical Analysis," Review of Finance, European Finance Association, vol. 5(3), pages 201-237.
    3. Ernst Eberlein & Nataliya Koval, 2006. "A cross-currency Levy market model," Quantitative Finance, Taylor & Francis Journals, vol. 6(6), pages 465-480.
    4. Benjamin Cheng & Christina Nikitopoulos-Sklibosios & Erik Schlogl, 2015. "Pricing of Long-dated Commodity Derivatives with Stochastic Volatility and Stochastic Interest Rates," Research Paper Series 366, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Raoul Pietersz & Marcel Regenmortel, 2006. "Generic market models," Finance and Stochastics, Springer, vol. 10(4), pages 507-528, December.
      • Pietersz, R. & van Regenmortel, M., 2005. "Generic Market Models," ERIM Report Series Research in Management ERS-2005-010-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
      • Raoul Pietersz & Marcel van Regenmortel, 2005. "Generic Market Models," Finance 0502009, University Library of Munich, Germany.
    6. Mikkelsen, Peter, 2001. "Cross-Currency LIBOR Market Models," Finance Working Papers 01-6, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    7. Schönbucher, Philipp J., 2000. "A Libor Market Model with Default Risk," Bonn Econ Discussion Papers 15/2001, University of Bonn, Bonn Graduate School of Economics (BGSE).
    8. Masaaki Fujii & Akihiko Takahashi, 2015. "A General Framework for the Benchmark pricing in a Fully Collateralized Market," Papers 1508.06339, arXiv.org, revised Sep 2015.
    9. Jui‐Jane Chang & Son‐Nan Chen & Ting‐Pin Wu, 2013. "Currency‐Protected Swaps and Swaptions with Nonzero Spreads in a Multicurrency LMM," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 33(9), pages 827-867, September.
    10. Ernst Eberlein & Wolfgang Kluge & Antonis Papapantoleon, 2006. "Symmetries In Lévy Term Structure Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(06), pages 967-986.
    11. Antonis Papapantoleon & John Schoenmakers & David Skovmand, 2011. "Efficient and accurate log-Lévi approximations to Lévi driven LIBOR models," CREATES Research Papers 2011-22, Department of Economics and Business Economics, Aarhus University.
    12. Antonis Papapantoleon & Maria Siopacha, 2009. "Strong Taylor approximation of stochastic differential equations and application to the L\'evy LIBOR model," Papers 0906.5581, arXiv.org, revised Oct 2010.
    13. Erik Schlögl, 2002. "Extracting the Joint Volatility Structure of Foreign Exchange and Interest Rates from Option Prices," Research Paper Series 79, Quantitative Finance Research Centre, University of Technology, Sydney.
    14. Antonis Papapantoleon, 2010. "Old and new approaches to LIBOR modeling," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 64(3), pages 257-275, August.
    15. Masaaki Fujii & Akihiko Takahashi, 2016. "A General Framework for the Benchmark pricing in a Fully Collateralized Market," CIRJE F-Series CIRJE-F-1000, CIRJE, Faculty of Economics, University of Tokyo.
    16. Samson Assefa, 2007. "Pricing Swaptions and Credit Default Swaptions in the Quadratic Gaussian Factor Model," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 31, July-Dece.
    17. Julien Hok & Philip Ngare & Antonis Papapantoleon, 2018. "Expansion formulas for European quanto options in a local volatility FX-LIBOR model," Papers 1801.01205, arXiv.org, revised Apr 2018.
    18. Ping Wu & Robert J. Elliott, 2016. "Valuation of CMS range notes in a multifactor LIBOR market model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 3(01), pages 1-19, March.
    19. Masaaki Fujii & Akihiko Takahashi, 2015. "Choice of Collateral Currency Updated -A market model for the benchmark pricing-," CARF F-Series CARF-F-371, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    20. Antonis Papapantoleon & John Schoenmakers & David Skovmand, 2011. "Efficient and accurate log-L\'evy approximations to L\'evy driven LIBOR models," Papers 1106.0866, arXiv.org, revised Jan 2012.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:261. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Duncan Ford (email available below). General contact details of provider: https://edirc.repec.org/data/qfutsau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.