Pricing commodity index options

TL;DR

This paper introduces a stochastic local volatility model tailored for pricing commodity index options, enabling accurate valuation of derivatives on futures and indices, with practical calibration examples on crude oil indices.

Contribution

The paper develops a novel stochastic local volatility model specifically designed for commodity index options, improving pricing accuracy for derivatives on futures and indices.

Findings

Model successfully calibrates to real market data

Accurate pricing of crude oil index options demonstrated

Provides a practical framework for commodity derivatives pricing

Abstract

We present a stochastic local volatility model for derivative contracts on commodity futures. The aim of the model is to be able to recover the prices of derivative claims both on futures contracts and on indices on futures strategies. Numerical examples for calibration and pricing are provided for the S&P GSCI Crude Oil excess-return index.