Chapter 34 Energy and Commodity Derivatives

The variable underlying a derivative is sometimes simply referred to as the underlying. Earlier parts of this book have focused on situations where the underlying is a stock price, a stock index, an exchange rate, a bond price, an interest rate, or the loss from a credit event. In this chapter, we consider a variety of other underlyings.

The first part of the chapter is concerned with situations where the underlying is a commodity. Chapter 2 discussed futures contracts on commodities and Chapter 18 discussed how European and American options on commodity futures contracts can be valued. As a European futures option has the same payoff as a European spot option when the futures contract matures ...

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