Skip to main content

Valuation of options on oil futures under the 3/4 oil price model

Journal Article


Download full-text (Open Access)

Abstract


  • Recently, an empirically-validated one-factor model with a 3/4-power diffusion term was introduced in the literature to model oil prices and value futures contracts on oil. In this paper, we provide an exact and analytic approximation for European call option prices on futures under a 3/4-power futures model. The analytic approximation, valid for short times to expiry is then calibrated to market prices. Results from the calibration show that the analytic approximation formula outperforms current popular options on futures formulae in capturing market prices.

Publication Date


  • 2015

Citation


  • Aba Oud, M. & Goard, J. M. (2015). Valuation of options on oil futures under the 3/4 oil price model. International Journal of Theoretical and Applied Finance, 18 (8), 1550050-1-1550050-12.

Scopus Eid


  • 2-s2.0-84948415956

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=6028&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/5001

Start Page


  • 1550050-1

End Page


  • 1550050-12

Volume


  • 18

Issue


  • 8

Abstract


  • Recently, an empirically-validated one-factor model with a 3/4-power diffusion term was introduced in the literature to model oil prices and value futures contracts on oil. In this paper, we provide an exact and analytic approximation for European call option prices on futures under a 3/4-power futures model. The analytic approximation, valid for short times to expiry is then calibrated to market prices. Results from the calibration show that the analytic approximation formula outperforms current popular options on futures formulae in capturing market prices.

Publication Date


  • 2015

Citation


  • Aba Oud, M. & Goard, J. M. (2015). Valuation of options on oil futures under the 3/4 oil price model. International Journal of Theoretical and Applied Finance, 18 (8), 1550050-1-1550050-12.

Scopus Eid


  • 2-s2.0-84948415956

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=6028&context=eispapers

Ro Metadata Url


  • http://ro.uow.edu.au/eispapers/5001

Start Page


  • 1550050-1

End Page


  • 1550050-12

Volume


  • 18

Issue


  • 8