Storage costs in commodity option pricing

Hinz, J; Fehr, M

Storage costs in commodity option pricing

Hinz, J Fehr, M

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Publication Type:: Journal Article
Citation:: SIAM Journal on Financial Mathematics, 2010, 1 (1), pp. 729 - 751
Issue Date:: 2010-12-01

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Field	Value	Language
dc.contributor.author	Hinz, J	en_US
dc.contributor.author	Fehr, M	en_US
dc.date.issued	2010-12-01	en_US
dc.identifier.citation	SIAM Journal on Financial Mathematics, 2010, 1 (1), pp. 729 - 751	en_US
dc.identifier.uri	http://hdl.handle.net/10453/32459
dc.description.abstract	Unlike derivatives of financial contracts, commodity options exhibit distinct particularities owing to physical aspects of the underlying. An adaptation of no-arbitrage pricing to this kind of derivative turns out to be a stress test, challenging the martingale-based models with diverse technical and technological constraints, with storability and short selling restrictions, and sometimes with the lack of an efficient dynamic hedging. In this work, we study the effect of storability on risk neutral commodity price modeling and suggest a model class where arbitrage is excluded for both commodity futures trading and simultaneous dynamical management of the commodity stock. The proposed framework is based on key results from interest rate theory. © 2010 Society for Industrial and Applied Mathematics.	en_US
dc.relation.ispartof	SIAM Journal on Financial Mathematics	en_US
dc.relation.isbasedon	10.1137/090746586	en_US
dc.title	Storage costs in commodity option pricing	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.for	0102 Applied Mathematics	en_US
utslib.for	0104 Statistics	en_US
utslib.for	1502 Banking, Finance and Investment	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 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	1	en_US
pubs.publication-status	Published	en_US
pubs.volume	1	en_US

Abstract:

Unlike derivatives of financial contracts, commodity options exhibit distinct particularities owing to physical aspects of the underlying. An adaptation of no-arbitrage pricing to this kind of derivative turns out to be a stress test, challenging the martingale-based models with diverse technical and technological constraints, with storability and short selling restrictions, and sometimes with the lack of an efficient dynamic hedging. In this work, we study the effect of storability on risk neutral commodity price modeling and suggest a model class where arbitrage is excluded for both commodity futures trading and simultaneous dynamical management of the commodity stock. The proposed framework is based on key results from interest rate theory. © 2010 Society for Industrial and Applied Mathematics.

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http://hdl.handle.net/10453/32459