Valuation of options on oil futures under the 3/4 oil price model

Authors

Mohammed A. Aba Oud, Al Imam Mohammad Ibn Saud Islamic UniversityFollow
Joanna Goard, University of WollongongFollow

RIS ID

104236

Publication Details

Aba Oud, M. & Goard, J. M. (2015). Valuation of options on oil futures under the 3/4 oil price model. International Journal of Theoretical and Applied Finance, 18 (8), 1550050-1-1550050-12.

Abstract

Recently, an empirically-validated one-factor model with a 3/4-power diffusion term was introduced in the literature to model oil prices and value futures contracts on oil. In this paper, we provide an exact and analytic approximation for European call option prices on futures under a 3/4-power futures model. The analytic approximation, valid for short times to expiry is then calibrated to market prices. Results from the calibration show that the analytic approximation formula outperforms current popular options on futures formulae in capturing market prices.