Commodity Option Pricing: A Practitioner's Guide

1 Introduction

At the time of the writing of this book, and since about the turn of the century, commodities have experienced a continued surge in both price (as shown in Figure 1.1) and interest in a world of increasingly scarce resources and rapid population growth together with demand growth in the rapidly industrialising emerging markets. This book is a practical quantitative analyst’s guide to how to get professionally involved in the world of commodities.

Figure 1.1 Price history of TR/J CRB Commodity Index (1994–2012, log-scale).

While the book is focused primarily on the market in commodity derivatives and the quantitative analysts (quants) who work in these markets, much commodity trading occurs through the vehicle of futures trading on organised exchanges, so I envisage this work will be of use to the traders, quant developers, structurers and finance professionals who work alongside the quants. Though this is first and foremost a practitioners’ book, I have attempted to put the material into context with regard to the literature in the area, which I believe will be of tangible benefit to academics and students of financial mathematics from all areas, who are interested in learning more about the fascinating world of commodities.

Although this is a technical book, I have attempted to make it as accessible as possible on several levels. One barrier to making the ...