Valuing Energy Options in a One Factor Model Fitted to Forward Prices

Les Clewlow and Chris Strickland
Additional contact information
Les Clewlow: Lacima Group
Chris Strickland: Lacima Group

No 10, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: 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 [1997] and Amin, et al. [1995].

Pages: 29 pages
Date: 1999-04-01
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Citations: View citations in EconPapers (52)

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