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A Pricing Model for Quantity Contracts
Author(s) -
Aase Knut K.
Publication year - 2004
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.0022-4367.2004.00106.x
Subject(s) - futures contract , yield (engineering) , economics , futures market , financial economics , order (exchange) , convenience yield , forward market , market price , econometrics , microeconomics , finance , spot contract , materials science , metallurgy
An economic model is proposed for a combined price futures and yield futures market. The innovation of the article is a technique of transforming from quantity and price to a model of two genuine pricing processes. This is required in order to apply modern financial theory. It is demonstrated that the resulting model can be estimated solely from data for a yield futures market and a price futures market. We develop a set of pricing formulas, some of which are partially tested, using price data for area yield options from the Chicago Board of Trade. Compared to a simple application of the standard Black and Scholes model, our approach seems promising.