Option Pricing with Shifted Lognormal Model for Negative Oil Prices

Henry Yang

Chapter 7 in The CME Vulnerability:The Impact of Negative Oil Futures Trading, 2020, pp 147-153 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Fischer Black and Myron Scholes (1973) assumed asset prices follow lognormal distributions and derived the famous Black–Scholes option pricing formula. The lognormal assumption implies the asset price will never be negative and has zero as its lower bound. By relaxing the negative and zero bound, we derive a Black–Scholes-like option pricing formula for asset prices following a shifted lognormal distribution with a lower bound. The formula can be applied to price options with negative prices and negative strikes.

Keywords: CME; Vulnerability; WTI; Oil; Trading; Rule; 420; Negative Trading Price; Best Practice; Valuation; Risk Management; Regulatory; Rule; Accounting; Standard; Fair Value; Trading Behaviour; Covid; Corona (search for similar items in EconPapers)
JEL-codes: G1 G10 G17 G32 (search for similar items in EconPapers)
Date: 2020
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