The valuation and information content of options on crude-oil futures contracts

Finbarr Murphy and Ehud Ronn ()

Review of Derivatives Research, 2015, vol. 18, issue 2, 95-106

Abstract: Using market prices for crude-oil futures options and the prices of their underlying futures contracts, we calibrate the volatility skew using the Merton (J Financ Econ 3:125–144, 1976 ) jump-diffusion option-pricing model. We demonstrate the jump-diffusion parameters bear a close relationship to concurrent economic, financial and geopolitical events. With each option’s implied-vol used to compute a Black–Scholes hedge ratio, the Merton model is contrasted to that Black–Scholes counterpart. The postulated Merton-style model is shown to yield useful parameters from which market prices can be computed, option prices can be marked-to-market and (imperfectly) hedged, as well as an informationally-rich structure covering the time period of the turbulent post-2007 time period. Copyright Springer Science+Business Media New York 2015

Keywords: Crude-oil futures and options; Informational content of derivative securities; G12; G13; G14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11147-014-9107-y

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