Time-dependent volatility in futures contract options

Published in: Investment Analysts Journal
Volume 48, issue 1, 2019 , pages: 30–41
DOI: 10.1080/10293523.2018.1560114
Author(s): Jilong ChenInternational Business School, School of Finance, China, Christian EwaldUniversity of Glasgow, UK, Ali M. KutanBusiness School, Department of Economics and Finance, USA


The Schwartz (1997) two-factor model is the benchmark model for pricing futures options, and the volatility is constant, which is similar to the Black-Scholes model. In this paper, we use a similar method which can make the Black-Scholes model be a time-dependent volatility model to show that the time-dependent volatility is also valid in the Schwartz (1997) two-factor model. The time-dependent spot volatility results can be obtained easily and quickly in Matlab. We also explain why the time-dependent spot volatility results need to be tested theoretically and show how to ensure their correctness in both theory and practice.

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