Type of Document	Dissertation
Author	Yoo, Eunjoo
URN	etd-07132008-183158
Title	Variance Gamma Pricing of American Futures Options
Degree	Doctor of Philosophy
Department	Mathematics, Department of
Advisory Committee	Advisor Name Title Craig Nolder Committee Chair Alec N. Kercheval Committee Member Betty Anne Case Committee Member Fred Huffer Committee Member Jack Quine Committee Member
Keywords	Variance Gamma Process American Options on Crude Oil Futures Commodity Calibration Random Tree Method Lévy Process
Date of Defense	2008-07-10
Availability	unrestricted
Abstract In financial markets under uncertainty, the classical Black-Scholes model cannot explain the empirical facts such as fat tails observed in the probability density. To overcome this drawback, during the last decade, Lévy process and stochastic volatility models were introduced to financial modeling. Today crude oil futures markets are highly volatile. It is the purpose of this dissertation to develop a mathematical framework in which American options on crude oil futures contracts are priced more effectively than by current methods. In this work, we use the Variance Gamma process to model the futures price process. To generate the underlying process, we use a random tress method so that we evaluate the option prices at each tree node. Through fifty replications of a random tree, the averaged value is taken as a true option price. Pricing performance using this method is accessed using American options on crude oil commodity contracts from December 2003 to November 2004. In comparison with the Variance Gamma model, we price using the Black-Scholes model as well. Over the entire sample period, a positive skewness and high kurtosis, especially in the short-term options, are observed. In terms of pricing errors, the Variance Gamma process performs better than the Black-Scholes model for the American options on crude oil commodities.
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