Cutting edge: Jamshidian decomposition for pricing European energy commodity swaptions
Cutting edge: Jamshidian decomposition for pricing European energy commodity swaptions
The main contribution of this article is to propose a practical method for calculating the exact price of energy commodity European swaptions under the standard Markov diffusion model for the term structure of energy commodity futures. Currently, industry practitioners prefer to price energy commodity European swaptions by approximating expectations of arithmetic averages of jointly log-normal variables, typically by using moment-matching assumptions. In order to obtain an exact price, the key
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