Commodity Futures Option


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Commodity Futures Option 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 Futures Option Introduction

A commodity Futures option is an option that gives the owner the right but not the obligation to buy or sell a commodity futures at a future date. The standard commodity futures option is usually a bullet option.

However, there is also a commodity average/Asian Futures option that has multiple Commodity futures. The matured payoff of the Asian commodity option depends on an arithmetic average of the underlying futures prices over a specified set of reset dates.

The underlying assets of commodity futures option include crude oil, refined oil products, natural gas, natural gas pipelines, base metals, and silver futures .

2. Commodity Futures Option Valuation

It is assumed that the underlying commodity futures of a commodity futures option follow a lognormal distribution. If the commodity futures option has only one underlying, the Valuation is relatively straightforward.

For a commodity futures option with multiple underlying futures and a set of reset dates, The complexity of the distribution of the matured payoff makes its pricing in full explicit analytical exact solution form almost impossible. The most common approach is by using Monte Carlo simulation, which is rather time consuming and is not appropriate for risk management purposes, either.