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Pricing of derivatives on commodity indices

journal contribution
posted on 2023-06-08, 12:34 authored by Johannes Rauch, Mikhail Krayzler, Bernhard Brunner, Rudi Zagst
This paper introduces a novel method for pricing commodity index derivatives consistently with market prices of derivatives on single commodities. We discuss the Black, mean-reversion and local volatility pricing models with special attention paid to the parameterization of volatility surfaces. We introduce an innovative two step regression approach for model calibration and present theoretical insights on futures correlations. In an empirical case study we perform the pricing of call and barrier options on the Dow Jones UBS Commodity Index by replicating the index with a portfolio of correlated single commodities. The choice of these commodity instruments is based on their liquidity.

History

Publication status

  • Published

Journal

International Review of Financial Analysis

ISSN

1057-5219

Publisher

Elsevier

Volume

29

Page range

143-151

Department affiliated with

  • Business and Management Publications

Full text available

  • No

Peer reviewed?

  • Yes

Legacy Posted Date

2016-05-18

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