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A contango-constrained model for storable commodity prices

✍ Scribed by Diana R. Ribeiro; Stewart D. Hodges

Publisher
John Wiley and Sons
Year
2005
Tongue
English
Weight
246 KB
Volume
25
Category
Article
ISSN
0270-7314

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✦ Synopsis

This article presents a model of commodity price dynamics under the riskneutral measure where the spot price switches between two distinct stochastic processes depending on whether or not inventory is being held. Specifically, the drift of the spot price is equal to the cost of carry when the stock is positive. Conversely, whenever the drift of the spot price is less than the cost of carry, no inventory is being held. The properties of the spot price and the forward curves implied by this model are illustrated and analyzed with the use of numerical examples. A comparison with the Diana R. Ribeiro thanks Fundação para a CiΓͺncia e Tecnologia, Portugal for the partial financial support provided for this project. The authors greatly appreciate the comments of Elizabeth Whalley, Robert Tompkins, Stathis Tompaidis, and an anonymous reviewer on earlier drafts of this article. All the errors remain the authors' responsibility.

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