Department   Ritsumeikan Asia Pacific University  College of International Management
   Position   Associate Professor
Language English
Publication Date 2016/03
Type Research paper (Academic/Professional Journal)
Peer Review Peer reviewed
Title Commodity Spread Option with Cointegration
Contribution Type Joint Work
Journal Asia-Pacific Financial Markets
Volume, Issue, Page 23(1),pp.1-44
Author and coauthor 大橋和彦
Details We derive the valuation formula of a European call option on the spread of two cointegrated commodity futures prices, based on the Gibson–Schwartz with cointegration (GSC) model. We also analyze the American commodity spread option including the early exercise premium representation and an analytical approximation valuation formulae with cointegration. In the numerical analysis, we compare the spread option values calculated by the GSC model and the Gibson–Schwartz (GS) model that ignores cointegration. Consistent with the intuition that the cointegration prevents the prices from diverging, the GSC model prices the commodity spread option lower than the GS model which have longer maturity of more than 6 years. In other words, the GS model may overprice the commodity spread options for those with longer maturity without taking account of cointegration.
ISSN 1387-2834