Commodity Derivatives Pricing with an Endogenous Convenience Yield Market Price of Risk

Posted: 9 Nov 2008 Last revised: 17 Sep 2010

See all articles by Sami Attaoui

Sami Attaoui

NEOMA Business School

Pierre Six

Neoma Business School

Date Written: November 8, 2008

Abstract

We develop a partial equilibrium model of the term structure of storable commodity futures and options on futures, where the stochastic movements of the convenience yield as well as those of interest rates and risk premia of primitives assets are considered. However, contrary to the existing literature, the risk premium of the convenience yield is derived endogenously. This framework is suited to the analysis of the impact of agent preference structure and investment horizon, along with other relevant state variables, on the convenience yield premium. Finally, closed form solutions for the prices of futures and options on futures are obtained, making our model suitable for commodity risk management.

Keywords: Commodities, convenience yield, market price of risk, futures, options

JEL Classification: G33, G12, G13

Suggested Citation

Attaoui, Sami and Six, Pierre, Commodity Derivatives Pricing with an Endogenous Convenience Yield Market Price of Risk (November 8, 2008). Available at SSRN: https://ssrn.com/abstract=1297867

Sami Attaoui

NEOMA Business School ( email )

Boulevard André Siegfried - BP 215
Mont Saint Aignan, 76825
France

Pierre Six (Contact Author)

Neoma Business School ( email )

1, rue du Maréchal Juin - BP 188
Mont Saint Aignan Cedex, Normandy 76825
France

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