Commodity Option Pricing PDF

Commodity Option Pricing PDF

Commodity Option Pricing PDF A Practitioner’s Guide covers commodity option pricing for quantitative analysts, traders or structurers in banks, hedge funds and commodity trading companies.

Category: Options

Author: Iain J. Clark 

Language: English

Free download link: At the end of the post


Commodity Option Pricing: A Practitioner’s Guide covers commodity option pricing for quantitative analysts, traders or structurers in banks, hedge funds and commodity trading companies.

Based on the author’s industry experience with commodity derivatives, this book provides a thorough and mathematical introduction to the various market conventions and models used in commodity option pricing. It introduces the various derivative products typically traded for commodities and describes how these models can be calibrated and used for pricing and risk management. The book has been developed with input from traders and examples using real world data, together with relevant up to date academic research.

The book includes practical descriptions of market conventions and quote codes used in commodity markets alongside typical products seen in broker quotes and used in calibration. Also discussed are commodity models and their mathematical derivation and volatility surface modelling for traded commodity derivatives. Gold, silver and other precious metals are addressed, including gold forward and gold lease rates, as well as copper, aluminium and other base metals, crude oil and natural gas, refined energy and electricity. There are also sections on the products encountered in commodities such as crack spread and spark spread options and alternative commodities such as carbon emissions, weather derivatives, bandwidth and telecommunications trading, plastics and freight.

Commodity Option Pricing is ideal for anyone working in commodities or aiming to make the transition into the area, as well as academics needing to familiarize themselves with the industry conventions of the commodity markets.

Table of Contents- Commodity Option Pricing PDF

1 Introduction 1

1.1 Trade, Commerce and Commodities 3

1.2 Adapting to Commodities as an Asset Class 8

1.3 Challenges in Commodity Models 12

2 Commodity Mathematics and Products 17

2.1 Spot, Forwards and Futures 17

2.2 The Black–Scholes and Black-76 Models 24

2.3 Forward and Futures Contracts 39

2.4 Commodity Swaps 42

2.5 European Options 44

2.6 American Options 50

2.7 Asian Options 54

2.8 Commodity Swaptions 70

2.9 Spread Options 73

2.10 More Advanced Models 78

3 Precious Metals 99

3.1 Gold Forward and Gold Lease Rates 101

3.2 Volatility Surfaces for Precious Metals 103

3.3 Survey of the Precious Metals 111

4 Base Metals 127

4.1 Futures, Options and TAPO Contracts 130

4.2 Commonly Traded Base Metals 139

5 Energy I – Crude Oil, Natural Gas and Coal 151

5.1 Crude Oil 154

5.2 Natural Gas 180

5.3 Coal 188

6 Energy II – Refined Products 195

6.1 The Refinery Basket 195

6.2 Gasoline 197

6.3 Heating Oil/Gas Oil 200

6.4 Petroleum Gases and Residual Fuel Oil 203

6.5 Seasonality and Volatility 205

6.6 Crack Spread Options 207

7 Power 213

7.1 Electricity Generation 214

7.2 Nonstorability and Decorrelation 217

7.3 Modelling Spikes in Electricity Markets 220

7.4 Swing Options 231

7.5 Spark Spread Options 232

8 Agricultural Derivatives 233

8.1 Grains 234

8.2 Oilseeds 242

8.3 Softs 244

8.4 Pulp and Paper 252

8.5 Livestock 253

9 Alternative Commodities 257

9.1 Carbon Emissions Trading 257

9.2 Weather Derivatives 261

9.3 Bandwidth and Telecommunication Trading 264

9.4 Plastics 265

9.5 Freight Derivatives 266

Conversion Factors 273

Futures Contract Symbols 275

Glossary 279

References 295

Further Reading 303


“It has been very hard to find a comprehensive option pricing book covering all exchange-traded commodities, until Iain Clark’s book. Commodity Option Pricing is a must-read for option traders, risk managers and quantitative analysts. The author combines academic rigor with real-world examples. Practitioners can find an extremely useful toolkit in option pricing and an excellent introduction to various commodities.”
Joseph Y. Chen, Chief, Market Analytics, Nexen

“Being himself a practitioner with a wealth of experience, Iain knows what is relevant to the daily work of commodities trading desks. He uses his remarkable pedagogical skills to develop the reader’s intuition for the models and products before delving into the practicalities of the commodities  markets. Many of the details covered in this book cannot be found elsewhere in the literature. I am pleased to recommend this book to quants and traders, who will soon find themselves relying on it in their daily work.”
Paul Bilokon, Director, Deutsche Bank

“Option pricing analytics for trading commodity derivatives can be quite different from those of equity and fixed income derivatives. This book fills a gap in current literature by presenting a comprehensive treatise on the risk characteristics associated with pricing and hedging commodity derivatives.
The author strikes a fine balance between option pricing theory and financial practice in the markets. The materials are succinctly written, with clear and insightful descriptions of the features of various commodity markets and state-of-the-art pricing models. This book is destined to be a valuable practical guide for practitioners and a useful academic reference for researchers in trading and understanding commodities derivatives.”
Yue Kuen Kwok, Professor, Department of Mathematics, Hong Kong University of Science and Technology

About the author

Dr Iain J. Clark  is former Head of Foreign Exchange and Commodities Quantitative Analysis at Standard Bank’s London office, and has also worked for JP Morgan, BNP Paribas, Lehman Brothers, Dresdner Kleinwort and UniCredit. He holds a PhD in applied mathematics and an MSc in financial mathematics. He is the author of Foreign Exchange Option Pricing: A Practitioner’s Guide and is currently an independent researcher and consultant.

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