The Pricing of Crude Oil Futures Contracts

Rajna Gibson and Eduardo S Schwartz

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: In this paper we present a two-factor model, which values American crude oil futures options using the spot price and the net marginal convenience yield of crude as the relevant state variable. The model also accounts for a non-stationary market price of convenience yield risk, the value of which is derived from the crude oil futures theoretical and market prices. In the empirical tests of the model based on NYMEX futures option contracts we compare its pricing errors to those of a benchmark: Black's futures option pricing model. The results suggest that the two- factor model provides a promising although yet incomplete - through it stationary price volatility assumption - alternative for pricing and hedging crude oil derivative instruments.

Keywords: Spot Prices; Commodity Futures; Commodity Options; Theory of Storage; Market Price of Risk; Inventories; NYMEX (search for similar items in EconPapers)
Date: 1990-11
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