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Seasonality in commodity prices: new approaches for pricing plain vanilla options

Author

Listed:
  • Carme Frau

    (Universitat de les Illes Balears)

  • Viviana Fanelli

    (Management and Business Law)

Abstract

We present a new term-structure model for commodity futures prices based on Trolle and Schwartz (2009), which we extend by incorporating seasonal stochastic volatility represented with two different sinusoidal expressions. We obtain a quasi-analytical representation of the characteristic function of the futures log-prices and closed-form expressions for standard European options’ prices using the fast Fourier transform algorithm. We price plain vanilla options on the Henry Hub natural gas futures contracts, using our model and extant models. We obtain higher accuracy levels with our model than with the extant models.

Suggested Citation

  • Carme Frau & Viviana Fanelli, 2024. "Seasonality in commodity prices: new approaches for pricing plain vanilla options," Annals of Operations Research, Springer, vol. 336(1), pages 1089-1131, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-022-05128-x
    DOI: 10.1007/s10479-022-05128-x
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    More about this item

    Keywords

    Commodities; Natural gas; Futures prices; Option pricing; Fast Fourier transform; Term-structure model; Analytical solution; Seasonal stochastic volatility; Sinusoidal functions;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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