Show TOC

Function documentationCommodity OTC Options Locate this document in the navigation structure

 

A commodity OTC option is a special kind of OTC option that has an underlying commodity forward. In the case of OTC options, the buyer of an option has a right but not an obligation to buy or sell the underlying commodity at a fixed price called the “strike price”.

All options have an expiry date that defines the period during which the right has to be exercised.

  • A put is an option to sell at fixed price. The buyer of a put has the right to sell the underlying commodity.

  • A call is an option to buy at a fixed price. The buyer of a call has the right to buy the underlying commodity.

You can calculate the net present value as well as the clean price of options on commodity forward deals.

Note Note

Important factors to note in this section are:

  • The Market Risk Analyzer can calculate the net present value of European options on commodity forwards using the Merton model.

  • American options use the Broadie and Detemple BBSR model.

  • The system calculates additional cash flows, such as fees or premiums.

  • Forward prices are taken from the commodity curve.

  • Volatility is maintained.

End of the note.

Note Note

This function is available with the business function TRM, Financial Risk Management for Commodities (FIN_TRM_COMM_RM).

End of the note.

Features

The Market Risk Analyzer can calculate the net present value of available options on commodity forwards. OTC commodity options can only be calculated if the horizon is before the maturity of the option and if the maturity of the option is before the maturity of the underlying forward.

The price calculator calculates the net present value of existing options on commodity forwards using the formulae shown here.

For call options:

This graphic is explained in the accompanying text.

For put options:

This graphic is explained in the accompanying text.

Where d1 and d2 are calculated using the following formulae:

This graphic is explained in the accompanying text.

Legend:

This graphic is explained in the accompanying text.

Greeks

The Greeks measure the sensitivity of the option to certain key factor changes. The Greeks options are as follows:

Delta

Measures the rate of change of option value with regard to the underlying commodity forward price.

Call

This graphic is explained in the accompanying text.

Put

This graphic is explained in the accompanying text.

Gamma

Gamma is the second derivative regarding the underlying price.

Call

This graphic is explained in the accompanying text.

Put

This graphic is explained in the accompanying text.

Theta

Measures the sensitivity of the value of the option over time.

Call

This graphic is explained in the accompanying text.

Put

This graphic is explained in the accompanying text.

Vega

Vega measures the volatility of the underlying commodity forward.

Call

This graphic is explained in the accompanying text.

Put

This graphic is explained in the accompanying text.

Activities

To calculate and view the NPV for a commodity OTC option, choose   Financial Risk Management for Commodities   Accounting   Valuation   TPM60 – Determine Net Present Values   and proceed as follows:

  1. Set the OTC Transactions indicator in the Product Groups section.

  2. Select a product type for commodity OTC options.

  3. Make any other selections in this screen, for example, Company Code or Transaction Type.

  4. Select your evaluation parameters.

  5. Choose Execute.

  6. A list of NPVs that meet your selection criteria is displayed.

Note Note

You can also calculate NPVs by entering the commodity OTC option characteristics in the NPV Analysis screen:   Financial Risk Management for Commodities   Analytics   Mark-to-Market & Sensitivities   JBRX – NPV Analysis  

End of the note.