Due to the complexity of commodity prices dynamics, valuation of commodity contingent claims is carried out in the extant literature via ad-hoc solutions, which are very complex and sometimes include approximations.

In this article we present up to date techniques and ready-to-implement solutions to perform the valuation, using some well known results in stochastic calculus to simplify formulae and deductions and a general algorithm to compute formulae in any dimension. We specifically show how this general framework can be implemented in the context of the two-factor model by Schwartz (1997), obtaining simpler expressions and more precise estimates than the up-biased approximations given by the author. Moreover, we show how to obtain the expression for the futures price given by Schwartz and Smith (2000) in a simpler way, avoiding unnecessary limit steps.

Andrés García-Mirantes
F. Matemáticas, Universidad de Oviedo, Oviedo, Spain

Francisco Javier Población
D.G.A. Supervisión, Banco de España, Madrid, Spain

Gregorio Serna
Facultad de Ciencias Jurídicas y Sociales, Toledo, Spain


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