Analogy based valuation of commodity options

Siddiqi, Hammad (2015). Analogy based valuation of commodity options. Risk and Sustainable Management Group Working Paper Series: Finance , School of Economics, University of Queensland.

Author Siddiqi, Hammad
Title Analogy based valuation of commodity options
School, Department or Centre School of Economics
Institution University of Queensland
Series Risk and Sustainable Management Group Working Paper Series: Finance
Publication date 2015-01-01
Total pages 26
Abstract/Summary Typically, three types of implied volatility smiles are seen in commodity options: the reverse skew, the smile, and the forward skew. I put forward an economic explanation for all three types of implied volatility smiles based on the idea that a commodity call option is valued in analogy with its underlying futures contract, where the underlying futures price follows geometric Brownian motion. Closed form solutions for commodity calls and puts exist in the presence of transaction costs. Analogy based jump diffusion model is also developed. The smiles are steeper with jump diffusion when compared with smiles with geometric Brownian motion.
Keyword Implied volatility smile
Implied volatility skew
Reverse skew
Forward skew
Q-Index Status Provisional Code
Institutional Status UQ
Additional Notes http://www.uq.edu.au/rsmg/WP/Finance/WPF15_1.pdf

Document type: Working Paper
Collection: School of Economics Publications
 
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Created: Tue, 27 Jan 2015, 12:44:25 EST by Hammad Siddiqi on behalf of School of Economics