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

Nastasi, Emanuele and Pallavicini, Andrea and Sartorelli, Giulio, Smile Modelling in Commodity Markets (August 29, 2018). Available at SSRN: https://ssrn.com/abstract=3240490 or http://dx.doi.org/10.2139/ssrn.3240490

Emanuele Nastasi

Marketz S.p.A. ( email )

Corso Europa 2
Milan, 20121
Italy

Andrea Pallavicini (Contact Author)

Intesa Sanpaolo ( email )

Largo Mattioli 3
Milan, MI 20121
Italy

Giulio Sartorelli

Banca IMI ( email )

Largo Mattioli,3
Milano, 20121
Italy

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