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A General Approach To Valuing Commodity-Linked Bonds

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  • Jin, Yufei
  • Turvey, Calum G.

Abstract

The purpose of this paper is to develop a general approach to valuing commodity-linked bonds (CLBs) based on the Heath-Jarrow-Morton (HJM) framework. The model deals with four dimensions of uncertainty: prices of the underlying commodity, the value of firm that issues bonds, interest rates, and convenience yields. A mathematical formula for the price of a commodity-linked bond is derived. The previous results in Black and Scholes (1973), Merton (1973), Schwartz (1982), and Atta-Mensah (1992) can be obtained by specifying appropriate restrictions in the general model. Using similar assumptions, as found in Miura and Yamauchi (1998) and Carr (1987), more reasonable results can be obtained through the application of the present model.

Suggested Citation

  • Jin, Yufei & Turvey, Calum G., 2004. "A General Approach To Valuing Commodity-Linked Bonds," 2004 Annual meeting, August 1-4, Denver, CO 20039, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea04:20039
    DOI: 10.22004/ag.econ.20039
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    References listed on IDEAS

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    1. Jimmy E. Hilliard & Jorge A. Reis, 1999. "Jump Processes in Commodity Futures Prices and Options Pricing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 273-286.
    2. Darren L. Frechette, 1997. "The Dynamics of Convenience and the Brazilian Soybean Boom," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1108-1118.
    3. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    4. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
    5. Gibson, Rajna & Schwartz, Eduardo S, 1990. "Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-976, July.
    6. Lin Chen, "undated". "Interest Rate Dynamics and Derivatives Pricing," Computing in Economics and Finance 1997 129, Society for Computational Economics.
    7. Hilliard, Jimmy E. & Reis, Jorge, 1998. "Valuation of Commodity Futures and Options under Stochastic Convenience Yields, Interest Rates, and Jump Diffusions in the Spot," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(1), pages 61-86, March.
    8. Miltersen, Kristian R. & Schwartz, Eduardo S., 1998. "Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(1), pages 33-59, March.
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    Cited by:

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