A Comparison of Pricing Models for Negative Oil Futures

A Comparison of Pricing Models for Negative Oil Futures

• Assistant Professor of Analytics Andrew Kumiega
• Greg Sterijevski, Ph.D., founder of CommodityVol.com

Abstract:

The oil market has gone through a tumultuous period in early 2020. The price of the West Texas Intermediate Blend hit a peak of over $60 per barrel and then plunged for the first time in history to a negative price for both the front month future (CLK0) and spot price at Cushing on April 20, 2020. This paper focuses on the apparent stability of the market during this time period and the financial engineering challenges that options and futures traders addressed to ensure the markets remained orderly and operating. We provide evidence that the market functioned normally in the face of a negative future price (CLK0) and the listing of negative strike options. We specifically focus on the difficulties in pricing and hedging of options under the traditional Black option model. Then we explore two alternative model formulations and comment on their applicability.

 

The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty, as well as research presentations made by faculty at other leading business schools.

All Illinois Tech faculty, students, and staff are invited to attend.

Join session on Blackboard Collaborate