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Evaluating Microscopic and Macroscopic Models for Derivative Contracts on Commodity Indices

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  • Alberto Manzano
  • Emanuele Nastasi
  • Andrea Pallavicini
  • Carlos V'azquez

Abstract

In this article, we analyze two modeling approaches for the pricing of derivative contracts on a commodity index. The first one is a microscopic approach, where the components of the index are modeled individually, and the index price is derived from their combination. The second one is a macroscopic approach, where the index is modeled directly. While the microscopic approach offers greater flexibility, its calibration results to be more challenging, thus leading practitioners to favor the macroscopic approach. However, in the macroscopic model, the lack of explicit futures curve dynamics raises questions about its ability to accurately capture the behavior of the index and its sensitivities. In order to investigate this, we calibrate both models using derivatives of the S\&P GSCI Crude Oil excess-return index and compare their pricing and sensitivities on path-dependent options, such as autocallable contracts. This research provides insights into the suitability of macroscopic models for pricing and hedging purposes in real scenarios.

Suggested Citation

  • Alberto Manzano & Emanuele Nastasi & Andrea Pallavicini & Carlos V'azquez, 2024. "Evaluating Microscopic and Macroscopic Models for Derivative Contracts on Commodity Indices," Papers 2408.00784, arXiv.org.
    • Handle: RePEc:arx:papers:2408.00784
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    References listed on IDEAS

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    1. Roger Lord & Remmert Koekkoek & Dick Van Dijk, 2010. "A comparison of biased simulation schemes for stochastic volatility models," Quantitative Finance, Taylor & Francis Journals, vol. 10(2), pages 177-194.
    2. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
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