Commodity Option
FinPricing offers:
Four user interfaces:
- Data API.
- Excel Add-ins.
- Model Analytic API.
- GUI APP.
Commodity 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 Option Introduction |
A commodity option is a derivatives that gives the owner the right but not the obligation to
purchase or sell a commodity asset at a future date. The payoff of a commodity option can either
depend on a forward price at the maturity date (a bullet option) or the average price of the
underlying (average option or Asian style option).
An Asian‐style option provides the holder with a payoff that depends on the average
price of an underlying asset (or basket of assets) observed on a predefined schedule of
dates.
The underlying assets of commodity option include base metals, crude oil, natural gas,
natural gas pipeline, precious metals, refined products, and AESO power.
| 2. Commodity Option Valuation |
While it may be assumed that the price of each asset on a single observation
date can be represented with a lognormal distribution, the weighted average of the
prices over all dates will not be lognormal.
The model assumes that the underlying commodity price follows a lognormal distribution with a skew adjusted volatility.
The weighted average of the commodity prices is also assumed to be lognormally distributed. The moment matching routine provides a fairly accurate solution for the option price.
TThe main challenge is the implied volatility used to calculate the option price. The skew correction is meant to account for the difference between the lognormal distribution assumed by the model and the true distribution observed in the market.