Pricing of derivatives on commodity indices

Johannes Rauch, Mikhail Krayzler, Bernhard Brunner and Rudi Zagst

International Review of Financial Analysis, 2013, vol. 29, issue C, 143-151

Abstract: This paper introduces a novel method for pricing commodity index derivatives consistently with market prices of derivatives on single commodities. We discuss the Black, mean-reversion and local volatility pricing models with special attention paid to the parameterization of volatility surfaces. We introduce an innovative two step regression approach for model calibration and present theoretical insights on futures correlations. In an empirical case study we perform the pricing of call and barrier options on the Dow Jones-UBS Commodity Index by replicating the index with a portfolio of correlated single commodities. The choice of these commodity instruments is based on their liquidity.

Keywords: Commodity index; Derivative pricing; Model calibration; Replication portfolio; Volatility surface (search for similar items in EconPapers)
JEL-codes: C60 G13 Q40 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:29:y:2013:i:c:p:143-151

DOI: 10.1016/j.irfa.2013.02.006

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