Commodity price risk management using option strategies

Option Pricing on Commodity Prices Using Jump Diffusion Models

In this paper, we aim at developing a model for option pricing to reduce the risks associated with Ethiopian commodity prices fluctuations. We used the daily closed Unwashed Lekempti grade 5 (ULK5) coffee and Whitish Wollega Sesame Seed Grade3 (WWSS3) prices obtained from Ethiopia commodity exchange (ECX) market to analyse the prices fluctuations.The natures of log-returns of the prices exhibit a...

The Role of Price Spreads and Reoptimization in the Real Option Management of Commodity Storage Assets

The real option management of commodity storage assets is an important practical problem. Practitioners approach the resulting stochastic optimization model using heuristic policies that rely on sequential reoptimization of linear programs. Used in conjunction with Monte Carlo simulation, these policies typically yield near optimal lower bound estimates on the value of storage. This paper revea...

Option Valuation and the Price of Risk

A valuation model is presented for options on stocks for which BlackScholes arbitrage does not entirely eliminate risk. The price dynamics of a portfolio of options and the underlying security is quanti ed by requiring that the excess reward-to-risk ratio of the portfolio be identical to that of the underlying stock: excess return risk portfolio = excess return risk stock : The nonlinear evolut...

Price Risk Management Strategies for Dairy Producers: A Historical Analysis

Storage Costs in Commodity Option

Unlike derivatives of financial contracts, commodity options exhibit distinct particularities owing to physical aspects of the underlying. An adaptation of no-arbitrage pricing to this kind of derivative turns out to be a stress test, challenging the martingale-based models with diverse technical and technological constraints, with storability and short selling restrictions, and sometimes with ...