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Option Pricing on Renewable Commodity Markets

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  • Jin, Na
  • Lence, Sergio H.
  • Hart, Chad E.
  • Hayes, Dermot J.

Abstract

Options markets on agricultural commodities with maturities that exceed 13 months seldom trade. Our hypothesis is that this market failure is due to the absence of an accurate option pricing model for commodities where mean reversion can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities where supply response works to bring prices back to production costs. The model suggests that traditional option pricing models will overprice long-term options on these markets.

Suggested Citation

  • Jin, Na & Lence, Sergio H. & Hart, Chad E. & Hayes, Dermot J., 2010. "Option Pricing on Renewable Commodity Markets," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 60955, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea10:60955
    DOI: 10.22004/ag.econ.60955
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    References listed on IDEAS

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    Keywords

    Agricultural Finance; Financial Economics;

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