Commodity Cap/Floor


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Commodity Cap/Floor Valuation


FinPricing provides valuation models for the following commodity products:

  • Commodity swap (average or bullet)
  • Commodity forward (average or bullet)
  • Commodity futures
  • Commodity cap and floor (average or bullet)
  • Commodity option (average or bullet)
  • Commodity futures option
  • Commodity swaption (average or bullet)
  • Check FinPricing valuation models

1. Commodity Cap/Floor Introduction

A cap is an option which entitles the option buyer to pay a fixed contract price if the settled commodity price at the settlement day is above the cap price. A floor is an option which entitles the option buyer to sell underlie commodity at the contract price on the s ettlement day if the settled price (Bullet or Average Price) at the time is below the floor price.

Caps protect buyers from rising commodity prices while floor protect buyers from falling commodity prices.

The underlying assets of commodity cap/floor include base metals, crude oil, natural gas, natural gas pipeline, precious metals, refined products, and AESO power.

2. Commodity Cap/Floor Valuation

The commodity caps and floors are the options that provide buyers the protection from the raising or decreasing of the average future prices. Each individual future price is assumed following log-normal distribution. But the sum of the future prices will not following the log-normal distribution.

A futures curve is used when pricing derivatives written on natural gas, crude oil and power, while a base metal curve or a precious metal curve is used to for valuing metal contracts.

The largest source of uncertainty is the forward commodity curve, from which the forward prices of the underlying commodity contracts are obtained.