Abstract
In this paper, we investigate the pricing of European crude oil options under nonlinear dynamics with stochastic behaviour and jump risks, incorporating the features of arising convenience yield of crude oil and potential extreme fluctuation in the dynamics of crude oil prices. We present a closed-form solution to European crude oil option prices under an incomplete market setting, after deriving the pricing kernel with the equilibrium method and determining the risk neutral dynamics of crude oil prices. We extend our model to a mean-reverting stochastic volatility case, which also admits an analytical formula for the equilibrium price of European crude-oil options. Finally, our model is shown to be consistent with a number of interesting facts documented in the recent literature.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
