A hybrid commodity and interest rate market model

Pilz, KF; Schlögl, E

A hybrid commodity and interest rate market model

Pilz, KF Schlögl, E

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Publication Type:: Journal Article
Citation:: Quantitative Finance, 2013, 13 (4), pp. 543 - 560
Issue Date:: 2013-04-01

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Field	Value	Language
dc.contributor.author	Pilz, KF	en_US
dc.contributor.author	Schlögl, E https://orcid.org/0000-0001-8898-6879	en_US
dc.date.issued	2013-04-01	en_US
dc.identifier.citation	Quantitative Finance, 2013, 13 (4), pp. 543 - 560	en_US
dc.identifier.issn	1469-7688	en_US
dc.identifier.uri	http://hdl.handle.net/10453/21999
dc.description.abstract	A joint model of commodity price and interest rate risk is constructed analogously to the multi-currency LIBOR Market Model (LMM). Going beyond a simple 're-interpretation' of the multi-currency LMM, issues arising in the application of the model to actual commodity market data are specifically addressed. Firstly, liquid market prices are only available for options on commodity futures, rather than forwards, thus the difference between forward and futures prices must be explicitly taken into account in the calibration. Secondly, we construct a procedure to achieve a consistent fit of the model to market data for interest options, commodity options and historically estimated correlations between interest rates and commodity prices. We illustrate the model by an application to real market data and derive pricing formulas for commodity spread options. © 2013 Copyright Taylor and Francis Group, LLC.	en_US
dc.relation.ispartof	Quantitative Finance	en_US
dc.relation.isbasedon	10.1080/14697688.2011.627879	en_US
dc.subject.classification	Finance	en_US
dc.title	A hybrid commodity and interest rate market model	en_US
dc.type	Journal Article
utslib.citation.volume	4	en_US
utslib.citation.volume	13	en_US
utslib.for	1501 Accounting, Auditing and Accountability	en_US
utslib.for	01 Mathematical Sciences	en_US
utslib.for	14 Economics	en_US
utslib.for	15 Commerce, Management, Tourism and Services	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Science
pubs.organisational-group	/University of Technology Sydney/Faculty of Science/School of Mathematical and Physical Sciences
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.issue	4	en_US
pubs.publication-status	Published	en_US
pubs.volume	13	en_US

Abstract:

A joint model of commodity price and interest rate risk is constructed analogously to the multi-currency LIBOR Market Model (LMM). Going beyond a simple 're-interpretation' of the multi-currency LMM, issues arising in the application of the model to actual commodity market data are specifically addressed. Firstly, liquid market prices are only available for options on commodity futures, rather than forwards, thus the difference between forward and futures prices must be explicitly taken into account in the calibration. Secondly, we construct a procedure to achieve a consistent fit of the model to market data for interest options, commodity options and historically estimated correlations between interest rates and commodity prices. We illustrate the model by an application to real market data and derive pricing formulas for commodity spread options. © 2013 Copyright Taylor and Francis Group, LLC.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/21999