Generic Price Model for Commodity Derivatives

David Lee

MPRA Paper from University Library of Munich, Germany

Abstract: This article develops a new framework for modeling the dynamics of commodity forward curves and pricing commodity derivatives. The model accommodates a generic calibration procedure to ensure that the model prices for vanilla options match exactly the market prices. Empirically we show that the model prices are within the bid-offer spreads, indicating prima facie that the model performs quite well. We also show that the model prices for non-vanilla options are in good agreement with the market prices and the implied model dynamics are in good agreement with the characteristics of the historical data series.

Keywords: commodity derivatives; multiple factor model; model calibration; volatility skew (search for similar items in EconPapers)
JEL-codes: C5 C51 C58 G12 G13 G15 G17 (search for similar items in EconPapers)
Date: 2022-08-22
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:114283

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