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The valuation and information content of options on crude-oil futures contracts

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  • Finbarr Murphy
  • Ehud Ronn

Abstract

Using market prices for crude-oil futures options and the prices of their underlying futures contracts, we calibrate the volatility skew using the Merton (J Financ Econ 3:125–144, 1976 ) jump-diffusion option-pricing model. We demonstrate the jump-diffusion parameters bear a close relationship to concurrent economic, financial and geopolitical events. With each option’s implied-vol used to compute a Black–Scholes hedge ratio, the Merton model is contrasted to that Black–Scholes counterpart. The postulated Merton-style model is shown to yield useful parameters from which market prices can be computed, option prices can be marked-to-market and (imperfectly) hedged, as well as an informationally-rich structure covering the time period of the turbulent post-2007 time period. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Finbarr Murphy & Ehud Ronn, 2015. "The valuation and information content of options on crude-oil futures contracts," Review of Derivatives Research, Springer, vol. 18(2), pages 95-106, July.
    • Handle: RePEc:kap:revdev:v:18:y:2015:i:2:p:95-106
    DOI: 10.1007/s11147-014-9107-y
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    Cited by:

    1. Frances Shaw & Finbarr Murphy & Fergal G. O’Brien, 2016. "Jumps in Euribor and the effect of ECB monetary policy announcements," Environment Systems and Decisions, Springer, vol. 36(2), pages 142-157, June.
    2. Fileccia, Gaetano & Sgarra, Carlo, 2018. "A particle filtering approach to oil futures price calibration and forecasting," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 21-34.

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    More about this item

    Keywords

    Crude-oil futures and options; Informational content of derivative securities; G12; G13; G14;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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