Empirical Performance of Alternative Option Pricing Models for Commodity Futures Options

The central part of pricing agricultural commodity futures options is to find appropriate stochastic process of the underlying assets. The Black’s (1976) futures option pricing model laid the foundation for a new era of futures option valuation theory. The geometric Brownian motion assumption girding the Black’s model, however, has been regarded as unrealistic in numerous empirical studies. Option pricing models incorporating discrete jumps and stochastic volatility have been studied extensively in the literature. This study tests the performance of major alternative option pricing models and attempts to find the appropriate model for pricing commodity futures options.