VALUATION OF OPTIONS ON OIL FUTURES UNDER THE 3/4 OIL PRICE MODEL

Mohammed A. Aba Oud () and Joanna Goard ()
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Mohammed A. Aba Oud: Department of Mathematics and Statistics, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh, Kingdom of Saudi Arabia
Joanna Goard: School of Mathematics and Applied Statistics, University of Wollongong, Northfields Ave, Wollongong 2522, NSW, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2015, vol. 18, issue 08, 1-12

Abstract: Recently, an empirically-validated one-factor model with a 3/4-power diffusion term was introduced in the literature to model oil prices and value futures contracts on oil. In this paper, we provide an exact and analytic approximation for European call option prices on futures under a 3/4-power futures model. The analytic approximation, valid for short times to expiry is then calibrated to market prices. Results from the calibration show that the analytic approximation formula outperforms current popular options on futures formulae in capturing market prices.

Keywords: Options on futures; options on oil; commodity options (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S0219024915500508

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