Pricing Futures and Futures Options with Basis Risk

In this article, assuming the stochastic behavior of basis as a modified Brownian bridge process, we obtain closed-form solutions of futures and futures options generalizing the Black (1976). The arrangement permits the formulas of futures and futures options to be functions of spot price, volatility of spot return, initial basis, basis volatility, as well as the correlation coefficient between basis and spot return. In the meantime, it also ensures the basis to be zero at maturity of futures contract.

Source
National Kaohsiung First University, of Science & Technology, Taiwan
Length of Resource
28
Resource File
Author
Chou-Wen Wang, TaiwanTing-Yi Wu
Date Published
Publication Type
paper
Resource Type
academic

ResourceID: 72600

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