Abstract:
In this paper, Black Scholes’s pricing model was developed to study American
option on future contracts of Brent oil. The practical tests of the model show that
market priced option contracts as future contracts less than what model did, which
mostly represent option contracts with price rather than without price. Moreover,
it suggests call option rather than put option. Using t hypothesis test, price differences
were obtained, which can serve as a useful strategy for traders interested in
arbitrage practice and risk hedging. This research introduces an optimal strategy
(both for call and put option states and buy and sell of future contract Δ) for all
options of buy and sell future contracts with and without price. In this research,
six-month data of the end of 2015 about oil option and option of future contracts
of North Sea oil for three different maturities were used.
Machine summary:
American future contract option ,Optimal strategy of trader,Price difference of model and market ABSTRACT In this paper, Black Scholes’s pricing model was developed to study American option on future contracts of Brent oil.
Shastri and Tandon [13] found a strategy for risk hedging, which yields excess profits in the market of oil option when there is price deviation from their corresponding model prices.
These two deterministic gains are equal to = (�, �) at any time;(View the image of this page) (7) When equation [7] is compared with a corresponding equation for value of American option on as- set that pay dividend�, we reach the same [7] equation by putting � = � g in the following equation; (View the image of this page) (8) It should be noted that the growth rate expected from payable profit of the asset under risk-neutral conditions is equal to … and then … represents the rate of zero motion of future price.
Testing hypothesis 3 In this test, the number of portfolio with positive return, critical value � and significance level ��; (View the image of this page) 4 Implementation of the Methodology Historical data, price of future contracts, and option of Brent oil are taken from Theice website.
Some tests were conducted to determine whether current market prices of oil future contract option are different from prices presented by the model.