Option Pricing on Renewable Commodity Markets

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.


Issue Date:
2010
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/60955
Total Pages:
1
Series Statement:
Poster
10618




 Record created 2017-04-01, last modified 2017-04-26

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