Option Pricing on Renewable Commodity Markets

Na Jin, Sergio Lence, Chad Hart and Dermot Hayes

No 60955, 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado from Agricultural and Applied Economics Association

Abstract: Options markets on agricultural commodities with maturities that exceed 13 months seldom trade. Our hypothesis is that this market failure is due to the absence of an accurate option pricing model for commodities where mean reversion can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities where supply response works to bring prices back to production costs. The model suggests that traditional option pricing models will overprice long-term options on these markets.

Keywords: Agricultural Finance; Financial Economics (search for similar items in EconPapers)
Pages: 1
Date: 2010
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Related works:
Working Paper: OPTION PRICING ON RENEWABLE COMMODITY MARKETS (2002)
Working Paper: Option Pricing on Renewable Commodity Markets (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea10:60955

DOI: 10.22004/ag.econ.60955

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