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A Convenience Yield Approximation Model for Mean‐Reverting Commodities
Author(s) -
Dockner Engelbert J.,
Eksi Zehra,
Rammerstorfer Margarethe
Publication year - 2015
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21670
Subject(s) - convenience yield , futures contract , spot contract , mean reversion , yield (engineering) , econometrics , economics , moneyness , commodity , geometric brownian motion , brownian motion , financial economics , mathematics , statistics , finance , economy , materials science , diffusion process , metallurgy , service (business)
Standard option‐based approximations for convenience yields make use of the assumption that commodity spot prices follow a geometric Brownian motion. While there is some empirical support for this assumption, prices of a wide variety of (agricultural) commodities mean revert. Using a mean‐reverting spot price process we derive a novel convenience yield approximation analytically. It corresponds to the difference between the present values of two floating‐strike Asian options written on the spot and the futures prices, respectively. Using natural gas spot and futures price data from four different trading locations, we compare convenience yield estimates derived from existing approximations to those of our new measure. We find that convenience yield estimates vary substantially across approximation methods and that differences can be attributed to the cost of carry and the moneyness of the options. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:625–654, 2015