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Pricing of derivatives on commodity indices
journal contributionposted 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.
JournalInternational Review of Financial Analysis
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- Business and Management Publications
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