Pricing of derivatives on commodity indices

Rauch, Johannes, Krayzler, Mikhail, Brunner, Bernhard and Zagst, Rudi (2013) Pricing of derivatives on commodity indices. International Review of Financial Analysis, 29. pp. 143-151. ISSN 1057-5219

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Abstract

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.

Item Type: Article
Keywords: Commodity index, derivative pricing, model calibration, replication portfolio, volatility surface
Schools and Departments: School of Business, Management and Economics > Business and Management
Depositing User: Dr Johannes Rauch
Date Deposited: 18 May 2016 10:29
Last Modified: 18 May 2016 10:29
URI: http://sro.sussex.ac.uk/id/eprint/41033
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