Pricing of Commodity and Energy Options

Fred Espen Benth and Paul Krühner
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Fred Espen Benth: University of Oslo
Paul Krühner: Vienna University of Economics and Business

Chapter Chapter 7 in Stochastic Models for Prices Dynamics in Energy and Commodity Markets, 2023, pp 197-229 from Springer

Abstract: Abstract Risk-neutral prices of options on infinite-dimensional forward price models are derived for general payoff functions. In the case of Gaussian forward price models, expressions for the prices are computed in terms of integrals over the normal density function. Several particular examples are analysed, where we recover the Black-76 formula for plain-vanilla call options and the Margrabe formula for spread options. Using the density method together with Gateaux differentiation, we derive expressions for the delta of option prices. A general pricing approach is developed based on the Fourier transform of the payoff function and the characteristic functional related to the price dynamics, where we include stochastic volatility in our analysis. The delta of the option price is also discussed in this case. Finally, we focus on Markovian forward models, and discuss stability of the prices when the payoff function is Lipschitz continuous.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-031-40367-5_7

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DOI: 10.1007/978-3-031-40367-5_7

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