Time-dependent volatility in futures contract options. Issue 1 (2nd January 2019)

• Record Type: Journal Article
• Authors: Chen, Jilong; Ewald, Christian; Kutan, Ali M.
• Is Part Of: Investment analysts journal. Volume 48:Issue 1(2019)
• Page Start: 30
• Page End: 41
• Publication Date: 2019-01-02
• Subjects: Futures options -- spot volatility -- Black-Scholes model; Investment analysis -- Periodicals; Investments -- Africa, Southern -- Periodicals; Finance -- Periodicals; Finance; Investment analysis; Investments; Africa, Southern; Periodicals; 332.605
• DOI: 10.1080/10293523.2018.1560114
• Languages: English
• ISSNs: 2077-0227

Abstract

ABSTRACT: The Schwartz (1997) two-factor model is the benchmark model for pricing futures options, and the volatility is constant, which is similar to the Black-Scholes model. In this paper, we use a similar method which can make the Black-Scholes model be a time-dependent volatility model to show that the time-dependent volatility is also valid in the Schwartz (1997) two-factor model. The time-dependent spot volatility results can be obtained easily and quickly in Matlab. We also explain why the time-dependent spot volatility results need to be tested theoretically and show how to ensure their correctness in both theory and practice.