Publication Type
Journal Article
Version
submittedVersion
Publication Date
5-2022
Abstract
To cope with the negative oil futures price caused by the COVID-19 recession, global commodity futures exchanges switched the option model from Black-Scholes to Bachelier in April 2020. This study reviews the literature on Bachelier's pioneering option pricing model and summarizes the practical results on volatility conversion, risk management, stochastic volatility, and barrier options pricing to facilitate the model transition. In particular, using the displaced Black-Scholes model as a model family with the Black-Scholes and Bachelier models as special cases, we not only connect the two models but also present a continuous spectrum of model choices.
Keywords
Bachelier model, Black-Scholes model, Displaced diffusion model, Normal model
Discipline
Finance | Finance and Financial Management
Research Areas
Finance
Publication
Journal of Futures Markets
Volume
42
Issue
5
First Page
959
Last Page
980
ISSN
0270-7314
Identifier
10.1002/fut.22315
Publisher
Wiley
Citation
CHOI, Jaehyuk; KWAK, Minsuk; TEE, Chyng Wen; and WANG, Yumeng.
A Black-Scholes user's guide to the Bachelier model. (2022). Journal of Futures Markets. 42, (5), 959-980.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6869
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1002/fut.22315