Pricing commodity index options
Alberto Manzano, Emanuele Nastasi, Andrea Pallavicini, Carlos, V\'azquez

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.
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Taxonomy
TopicsMarket Dynamics and Volatility · Capital Investment and Risk Analysis
