Valuation of Crude Oil Futures, Options and Variance Swaps
Abstract
In this research we provide a set of practical approaches to value crude oil futures, especially long dated ones given crude oil spot prices. Throughout the research we change the reference point for our data sets from calendar dates to time to expiry and all our models are analyzed based on time to expiry.
We use a set of Levy processes to value crude oil options by calibrating parameters using Fast Fourier Transform algorithm and solving an objective function using Particle-Swap Optimization.
In order to help market participants to use available crude oil storage and refinery data in pricing futures contracts and the spreads between them, we provide a framework that helps crude oil market participants to get fair value of futures and run scenario analysis if a physical factor such as level of inventories at Cushing\Oklahoma or in the US changes.
We also investigated variance risk premia in crude oil prices using information obtained from crude oil option prices. Our results indicate that “usually” there is a negative risk premium in crude oil prices but that does not necessarily provide trading opportunity for market participants because excess return of shorting the variance swap show huge losses when crude oil market is in turmoil.
Description
Keywords
Education--Mathematics, Economics--Finance, Energy, Engineering--Petroleum
Citation
Shahmoradi, A. (2016). Valuation of Crude Oil Futures, Options and Variance Swaps (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/28629