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Pricing of Derivatives on Mean-Reverting Assets

Part of the Lecture Notes in Economics and Mathematical Systems Book Series (volume 630)

DOI: 10.1007/978-3-642-02909-7

ISBN: 978-3-642-02908-0

Publisher: Springer Berlin Heidelberg - Springer Journals

Aug 5, 2009

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Chapter 1Introduction

Lutz, Björn

Pages: 1 –7

[The commodity derivatives market has strongly increased in recent years, both in trading volume and the variety of offered products. Adequate models to price and hedge commodity futures and options are required and a multitude of models are already proposed. However, the derivative pricing...
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Chapter 2Mean Reversion in Commodity Prices

Lutz, Björn

Pages: 9 –16

[In this chapter, we discuss the sources, empirical evidence and implications of mean reversion in asset prices. As for the sources of mean reversion, there are three aspects to be discussed. Firstly and most importantly, the correlation between the convenience yield and spot prices accounts for...
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Chapter 3Fundamentals of Derivative Pricing

Lutz, Björn

Pages: 17 –53

[In this chapter, we discuss the basics for the pricing of European options and futures in a generalized setting. We begin with some technical preliminaries to provide a framework which is based on an underlying price process with subordinated stochastic volatility process. This framework can...
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Chapter 4Stochastic Volatility Models

Lutz, Björn

Pages: 55 –79

[So far, the characteristic function of the log-price at maturity was used without further specifications. In the following chapters, we derive characteristic functions for different settings. Once the characteristic function is obtained, it can be applied in the pricing equations as presented...
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Chapter 5Integration of Jump Components

Lutz, Björn

Pages: 81 –99

[Jumps are a feature which may occur both in the underlying and in the subordinated processes. They show typically negative correlation, i.e., a downward jump in the underlying process is associated with an upward jump in the variance process. The negative correlation of Brownian motions in the...
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Chapter 6Stochastic Equilibrium Level of the Underlying Process

Lutz, Björn

Pages: 101 –114

[The values of \documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document} $$\overline{S}$$...
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Chapter 7Deterministic Seasonality Effects

Lutz, Björn

Pages: 115 –126

[Seasonality in price movements and volatility is an important difference between certain commodity classes and standard financial assets. Especially for agricultural commodities, one observes a repeating cyclical pattern of decreasing prices at the harvesting period and after the harvest and a...
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Chapter 8Conclusion

Lutz, Björn

Pages: 127 –131

[In this thesis, we discussed and extended existing pricing models for derivatives on mean-reverting assets. The pricing formulas are based on the Fourier inversion approach of Heston (1993), whereas the specification of the underlying price process traces back to the incomplete market setup in...

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