CIRJE-F-681 "Pricing Average Options on Commodities"
Author Name Shiraya, Kenichiro and Akihiko Takahashi
Date October 2009
Full Paper @
Remarks @Revised in May 2010; revised as CIRJE-F-747 (2010); subsequenlty published in Journal of Futures Markets, Vol.31-5,407-439, 2011.
Abstract

This paper proposes a new approximation formula for pricing average options on commodities under a stochastic volatility environment. In particular, it derives an option pricing formula under Heston and an extended λ-SABR stochastic volatility models (which includes an extended SABR model as a special case). Moreover, numerical examples support the accuracy of the proposed average option pricing formula.