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A Black-Scholes user's guide to the Bachelier model

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  • Jaehyuk Choi
  • Minsuk Kwak
  • Chyng Wen Tee
  • Yumeng Wang

Abstract

To cope with the negative oil futures price caused by the COVID-19 recession, global commodity futures exchanges temporarily switched the option model from Black--Scholes to Bachelier in 2020. This study reviews the literature on Bachelier's pioneering option pricing model and summarizes the practical results on volatility conversion, risk management, stochastic volatility, and barrier options pricing to facilitate the model transition. In particular, using the displaced Black-Scholes model as a model family with the Black-Scholes and Bachelier models as special cases, we not only connect the two models but also present a continuous spectrum of model choices.

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  • Jaehyuk Choi & Minsuk Kwak & Chyng Wen Tee & Yumeng Wang, 2021. "A Black-Scholes user's guide to the Bachelier model," Papers 2104.08686, arXiv.org, revised Feb 2022.
    • Handle: RePEc:arx:papers:2104.08686
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    References listed on IDEAS

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    1. Daniel Guterding, 2023. "Sparse Modeling Approach to the Arbitrage-Free Interpolation of Plain-Vanilla Option Prices and Implied Volatilities," Risks, MDPI, vol. 11(5), pages 1-24, April.

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