Contemporary Issues: Valuing Long-Term Commodity Assets

Financial Management, "Spring 1998"

Posted: 15 Jun 1998

See all articles by Eduardo S. Schwartz

Eduardo S. Schwartz

University of California, Los Angeles (UCLA) - Finance Area; Simon Fraser University (SFU); National Bureau of Economic Research (NBER)

Abstract

In this article, I develop a one-factor model for the stochastic behavior of commodity prices that retains most of the characteristics of a more complex two-factor stochastic convenience yield model in terms of its ability to price the term structures of futures prices and volatilities. The model is based on the pricing and volatility results of the two-factormodel. When applied to the valuation of long-term commodity projects, it gives practically the same results as the more complex model. The inputs to the model are the current prices of all existing futures contracts (and their maturities) and the estimated parameters of the two-factor model. It only requires, however, the numerical solution corresponding to a simple one-factor model. Existing computer programs can be easily modified to incorporate the essential elements of the new model.

JEL Classification: G12

Suggested Citation

Schwartz, Eduardo S. and Schwartz, Eduardo S., Contemporary Issues: Valuing Long-Term Commodity Assets. Financial Management, "Spring 1998", Available at SSRN: https://ssrn.com/abstract=95148

Eduardo S. Schwartz (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1953 (Phone)
310-206-5455 (Fax)

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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