SMILE MODELING IN COMMODITY MARKETS

Emanuele Nastasi (), Andrea Pallavicini and Giulio Sartorelli ()
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Emanuele Nastasi: Exprivia, Via dei Valtorta 43, 20127 Milan, Italy
Giulio Sartorelli: Financial Engineering, Banca IMI, Largo Mattioli 3, 20121 Milan, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 03, 1-28

Abstract: We present a stochastic local volatility model for derivative contracts on commodity futures able to describe forward curve and smile dynamics with a fast calibration to liquid market quotes. A parsimonious parametrization is introduced to deal with the limited number of options quoted in the market. Cleared commodity markets for futures and options are analyzed to include in the pricing framework-specific trading clauses and margining procedures. Numerical examples for calibration and pricing are provided for different commodity products.

Keywords: Commodity; option pricing; margining procedures; collaterals; local volatility; stochastic volatility (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Working Paper: Smile Modelling in Commodity Markets (2020)
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DOI: 10.1142/S0219024920500193

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