Pricing average options on commodities |
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| Authors: | Kenichiro Shiraya Akihiko Takahashi |
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| Institution: | 1. Senior Financial Engineer, Mizuho‐DL Financial Technology Co., Ltd., Chiyoda‐ku, Tokyo, Japan;2. Professor, the Graduate School of Economics, University of Tokyo, Bunkyo‐ku, Tokyo, Japan |
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| Abstract: | This study proposes a new approximation formula for pricing average options on commodities under a stochastic volatility environment. In particular, it derives an option pricing formula under Heston and an extended λ‐SABR stochastic volatility models (which includes an extended SABR model as a special case). Moreover, numerical examples support the accuracy of the proposed average option pricing formula. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark Mark 31:407–439, 2011 |
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