Black to Negative: Embedded optionalities in commodities markets
Pricing of Securities
2020-10-30 v2 Risk Management
Abstract
We address the modelling of commodities that are supposed to have positive price but, on account of a possible failure in the physical delivery mechanism, may turn out not to. This is done by explicitly incorporating a `delivery liability' option into the contract. As such it is a simple generalisation of the established Black model.
Keywords
Cite
@article{arxiv.2006.06076,
title = {Black to Negative: Embedded optionalities in commodities markets},
author = {Richard J. Martin and Aldous Birchall},
journal= {arXiv preprint arXiv:2006.06076},
year = {2020}
}
Comments
Extended section on Levy models and given explicit formulae and numerical example. Corrected typo in put/call formulae (eq.5,6 in this vsn)