CIRJE-F-529 "Pricing and Hedging of Long-term Futures and Forward Contracts by a Three-Factor Model"
Author Name Shiraya, Kenichiro and Akihiko Takahashi
Date November 2007
Full Paper PDF file
Remarks Revised in December 2007; revised as CIRJE-F-618 (2009); subsequently published in Quantitative Finance, Page 1-16, Ahead of Print. Available online, 24 March 2010.
Abstract

This paper proposes a new three-factor model with stochastic mean reversions for commodity prices and derives the closed-form solution for the term structure of futures prices. Moreover, it is confirmed that the prices of crude oil and copper futures prices estimated by our model replicate the observed ones very well. Finally, detailed performance analysis of hedging illiquid long-term futures and forwards with liquid short and medium-term futures shows the validity of our method.