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Pricing of commodity derivatives on processes with memory

Fred Espen Benth, Asma Khedher and Michèle Vanmaele (UGent)
(2020) RISKS. 8(1).
Author
Organization
Abstract
Spot option prices, forwards and options on forwards relevant for the commodity markets are computed when the underlying process S is modelled as an exponential of a process xi with memory as, e.g., a Volterra equation driven by a Levy process. Moreover, the interest rate and a risk premium rho representing storage costs, illiquidity, convenience yield or insurance costs, are assumed to be stochastic. When the interest rate is deterministic and the risk premium is explicitly modelled as an Ornstein-Uhlenbeck type of dynamics with a mean level that depends on the same memory term as the commodity, the process (xi;rho) has an affine structure under the pricing measure Q and an explicit expression for the option price is derived in terms of the Fourier transform of the payoff function.
Keywords
EXPONENTIAL MOMENTS, AFFINE, VOLATILITY, VALUATION, DRIVEN, equivalent measures, derivatives pricing, commodity markets, Langevin, equation, affine processes, Fourier transform

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Citation

Please use this url to cite or link to this publication:

MLA
Benth, Fred Espen, et al. “Pricing of Commodity Derivatives on Processes with Memory.” RISKS, vol. 8, no. 1, Mdpi, 2020, doi:10.3390/risks8010008.
APA
Benth, F. E., Khedher, A., & Vanmaele, M. (2020). Pricing of commodity derivatives on processes with memory. RISKS, 8(1). https://doi.org/10.3390/risks8010008
Chicago author-date
Benth, Fred Espen, Asma Khedher, and Michèle Vanmaele. 2020. “Pricing of Commodity Derivatives on Processes with Memory.” RISKS 8 (1). https://doi.org/10.3390/risks8010008.
Chicago author-date (all authors)
Benth, Fred Espen, Asma Khedher, and Michèle Vanmaele. 2020. “Pricing of Commodity Derivatives on Processes with Memory.” RISKS 8 (1). doi:10.3390/risks8010008.
Vancouver
1.
Benth FE, Khedher A, Vanmaele M. Pricing of commodity derivatives on processes with memory. RISKS. 2020;8(1).
IEEE
[1]
F. E. Benth, A. Khedher, and M. Vanmaele, “Pricing of commodity derivatives on processes with memory,” RISKS, vol. 8, no. 1, 2020.
@article{8689783,
  abstract     = {{Spot option prices, forwards and options on forwards relevant for the commodity markets are computed when the underlying process S is modelled as an exponential of a process xi with memory as, e.g., a Volterra equation driven by a Levy process. Moreover, the interest rate and a risk premium rho representing storage costs, illiquidity, convenience yield or insurance costs, are assumed to be stochastic. When the interest rate is deterministic and the risk premium is explicitly modelled as an Ornstein-Uhlenbeck type of dynamics with a mean level that depends on the same memory term as the commodity, the process (xi;rho) has an affine structure under the pricing measure Q and an explicit expression for the option price is derived in terms of the Fourier transform of the payoff function.}},
  articleno    = {{8}},
  author       = {{Benth, Fred Espen and Khedher, Asma and Vanmaele, Michèle}},
  issn         = {{2227-9091}},
  journal      = {{RISKS}},
  keywords     = {{EXPONENTIAL MOMENTS,AFFINE,VOLATILITY,VALUATION,DRIVEN,equivalent measures,derivatives pricing,commodity markets,Langevin,equation,affine processes,Fourier transform}},
  language     = {{eng}},
  number       = {{1}},
  pages        = {{31}},
  publisher    = {{Mdpi}},
  title        = {{Pricing of commodity derivatives on processes with memory}},
  url          = {{http://doi.org/10.3390/risks8010008}},
  volume       = {{8}},
  year         = {{2020}},
}
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