VALUATION OF OPTIONS ON OIL FUTURES UNDER THE 3/4 OIL PRICE MODEL

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 futu...

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Bibliographic Details
Published in:International journal of theoretical and applied finance 2015-12, Vol.18 (8), p.1550050
Main Authors: OUD, MOHAMMED A. ABA, GOARD, JOANNA
Format: Article
Language:English
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Summary: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.
ISSN:0219-0249
1793-6322
DOI:10.1142/S0219024915500508