Seasonality in commodity prices: new approaches for pricing plain vanilla options

Carme Frau () and Viviana Fanelli ()
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Carme Frau: Universitat de les Illes Balears
Viviana Fanelli: Management and Business Law

Annals of Operations Research, 2024, vol. 336, issue 1, No 37, 1089-1131

Abstract: Abstract We present a new term-structure model for commodity futures prices based on Trolle and Schwartz (2009), which we extend by incorporating seasonal stochastic volatility represented with two different sinusoidal expressions. We obtain a quasi-analytical representation of the characteristic function of the futures log-prices and closed-form expressions for standard European options’ prices using the fast Fourier transform algorithm. We price plain vanilla options on the Henry Hub natural gas futures contracts, using our model and extant models. We obtain higher accuracy levels with our model than with the extant models.

Keywords: Commodities; Natural gas; Futures prices; Option pricing; Fast Fourier transform; Term-structure model; Analytical solution; Seasonal stochastic volatility; Sinusoidal functions (search for similar items in EconPapers)
JEL-codes: C51 C63 G13 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10479-022-05128-x

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