Pricing and hedging european energy derivatives: A case study of wti oil options

Chih Chen Hsu, Shih Kuei Lin, Ting Fu Chen

Research output: Contribution to journalArticlepeer-review

4 Scopus citations


This study extends the mean-reversion dynamic framework of (Pilipovic, Energy risk: Valuing and managing energy derivatives, 1997) and (Schwartz, The stochastic behavior of commodity prices: Implications for pricing and hedging, Journal of Finance 52, 1997, 923) and focuses on developing a variety of continuous-time commodity-pricing and hedging models by analyzing the pricing and hedging errors found in an empirical investigation of options contracts on light sweet crude oil traded on the New York Mercantile Exchange. Thus, this study contributes to furthering the applicability of the models developed. The inclusion of the benchmark Black-Scholes pricing model generates systematic biases that are consistent with (Bakshi, Cao and Chen, Handbook of Quantitative Finance and Risk Management, 2010). The mean-reversion jump-diffusion and seasonality option-pricing model best describes the extreme price volatility experienced during a financial collapse, but the mean-reversion and seasonality option-pricing model offers the best pricing and hedging capability for other periods. The performances of hedging models are generally consistent with pricing errors.

Original languageEnglish
Pages (from-to)317-355
Number of pages39
JournalAsia-Pacific Journal of Financial Studies
Issue number3
StatePublished - Jun 2014


  • Jump-diffusion
  • Mean-reversion
  • Seasonality
  • Systematic biases


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