Smile Modelling in Commodity Markets
26 Pages Posted: 12 Sep 2018 Last revised: 26 Jan 2020
Date Written: August 29, 2018
Abstract
We present a stochastic-local volatility model for derivative contracts on commodity futures able to describe forward-curve and smile dynamics with a fast calibration to liquid market quotes. A parsimonious parametrization is introduced to deal with the limited number of options quoted in the market. Cleared commodity markets for futures and options are analyzed to include in the pricing framework specific trading clauses and margining procedures. Numerical examples for calibration and pricing are provided for different commodity products.
Keywords: Commodity, Option Pricing, Margining Procedures, Collaterals, Local Volatility, Stochastic Volatility
JEL Classification: C63, G13
Suggested Citation: Suggested Citation