Valuing Energy Options in a One Factor Model Fitted to Forward Prices

28 Pages Posted: 24 May 1999

See all articles by Les Clewlow

Les Clewlow

Lacima; University of Warwick - Financial Options Research Centre (FORC); University of Technology Sydney (UTS) - School of Finance and Economics

Chris Strickland

University of Technology Sydney (UTS)

Date Written: April 1999

Abstract

In this paper we develop a single-factor modeling framework which is consistent with market observable forward prices and volatilities. The model is a special case of the multi-factor model developed in Clewlow and Strickland [1999b] and leads to analytical pricing formula for standard options, caps, floors, collars and swaptions. We also show how American style and exotic energy derivatives can be priced using trinomial trees, which are constructed to be consistent with the forward curve and volatility structure. We demonstrate the application of the trinomial tree to the pricing of a European and American Asian option. The analysis in this paper extends the results in Schwartz [1997] and Amin, et al. [1995].

JEL Classification: G13

Suggested Citation

Clewlow, Les and Strickland, Chris, Valuing Energy Options in a One Factor Model Fitted to Forward Prices (April 1999). Available at SSRN: https://ssrn.com/abstract=160608 or http://dx.doi.org/10.2139/ssrn.160608

Les Clewlow (Contact Author)

Lacima ( email )

London
United Kingdom

HOME PAGE: http://www.lacimagroup.com

University of Warwick - Financial Options Research Centre (FORC)

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www.wbs.ac.uk/expertise/research_teaching/f

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

HOME PAGE: http://www.business.uts.edu.au/finance/

Chris Strickland

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

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