This article presents a simple yet powerful new approach for approximating the value of America11 options by simulation. The kcy to this approach is the use of least squares to estimate the conditional expected payoff to the optionholder from continuation. This makes this approach readily applicable in path-dependent and multifactor situations where traditional finite difference techniques cannot be used. We illustrate this technique with several realistic exatnples including valuing an option when the underlying asset follows a jump-diffusion process and valuing an America11 swaption in a 20-factor string model of the term structure. One of the most important problems in option pricing theory is the valuation and optimal exercise of derivatives with American-style exercise features. These types of derivatives are found in all major financial markets including the equity, commodity, foreign exchange, insurance, energy, sovereign, agency, municipal, mortgage, credit, real estate, convertible, swap, and emerging markets. Despite recent advances, however, the valuation and optimal exercise of American options remains one of the most challenging problems in derivatives finance, particularly when more than one factor affects the value of the option. This is primarily because finite difference and binomial techniques become impractical in situations where there are multiple factors.' We are grateful for the cotnl~lelits of
In this article we compare three models of the stochastic behavior of commodity prices that take into account mean reversion, in terms of their ability to price existing futures contracts, and their implication with respect to the valuation of other financial and real assets. The first model is a simple one‐factor model in which the logarithm of the spot price of the commodity is assumed to follow a mean reverting process. The second model takes into account a second stochastic factor, the convenience yield of the commodity, which is assumed to follow a mean reverting process. Finally, the third model also includes stochastic interest rates. The Kalman filter methodology is used to estimate the parameters of the three models for two commercial commodities, copper and oil, and one precious metal, gold. The analysis reveals strong mean reversion in the commercial commodity prices. Using the estimated parameters, we analyze the implications of the models for the term structure of futures prices and volatilities beyond the observed contracts, and for hedging contracts for future delivery. Finally, we analyze the implications of the models for capital budgeting decisions.
Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: We adopt Schwartz and Smith's model (2000) to calculate risk measures of Brent oil futures contracts and light sweet crude oil (WTI) futures contracts and Mirantes, Poblacion and Serna's model (2012) to calculate risk measures of natural gas futures contracts, gasoil futures contracts, heating oil futures contracts, RBOB gasoline futures contracts, PJM western hub peak and off-peak electricity futures contracts. We show that the models present well goodness of fit and explain two stylized facts of the data: the Samuelson effect and the seasonality effect. Our backtesting results demonstrate that the models provide satisfactory risk measures for listed energy commodity futures contracts. A simple estimation method possessing quick convergence is developed. JEL classifications: C58; G13; G32
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.