CaltechAUTHORS
  A Caltech Library Service

The Pricing and Social Value of Commodity Options

Camerer, Colin (1982) The Pricing and Social Value of Commodity Options. Financial Analysts Journal, 38 (1). pp. 62-66. ISSN 0015-198X. http://resolver.caltech.edu/CaltechAUTHORS:20110215-120353870

Full text is not posted in this repository. Consult Related URLs below.

Use this Persistent URL to link to this item: http://resolver.caltech.edu/CaltechAUTHORS:20110215-120353870

Abstract

Commodity options are the right to buy or sell a specified quantity of a commodity, or commodity futures contract, at a specified price. The publicity surrounding several "boiler room" scams involving unwary buyers has given commodity options a bad name. Currently, only a handful of firms sell legitimate commodity options. Commodity options can, however, offer social benefits not provided by other investment vehicles. For example, they have several advantages over futures contracts. Their prices reflect information more quickly and fully than the prices of futures contracts. They allow investors to eliminate the risk of margin calls by paying an option "premium" up front. They allow producers and investors to hedge quantity, as well as price, risk for seasonal crops; using futures contracts, a farmer can form a perfect riskless hedge only if he knows exactly how much of a commodity he will have after a future harvest. Furthermore, the distribution of returns on options, which ensures that only the premium is lost regardless of how much futures prices fall, may attract to commodity option markets investors who need to hedge their assets against volatile fluctuations in price. The Securities and Exchange Commission and the Commodity Futures Trading Commission have recently moved to allow exchange trading of commodity options. Organized exchange trading may be expected to increase trading in, hence expand the social benefits of, commodity options. Exchange trading might also improve price "efficiency" in option markets. Tests using a variant of the Black-Scholes formula for option pricing indicate that, under the current system of private firm market-making, commodity option prices do not always accurately reflect all available information.


Item Type:Article
Related URLs:
URLURL TypeDescription
http://dx.doi.org/10.2469/faj.v38.n1.62DOIUNSPECIFIED
http://www.cfapubs.org/doi/abs/10.2469/faj.v38.n1.62PublisherUNSPECIFIED
ORCID:
AuthorORCID
Camerer, Colin0000-0003-4049-1871
Additional Information:© 1982 CFA Institute.
Record Number:CaltechAUTHORS:20110215-120353870
Persistent URL:http://resolver.caltech.edu/CaltechAUTHORS:20110215-120353870
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:22203
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:09 Mar 2011 22:42
Last Modified:23 Aug 2016 09:58

Repository Staff Only: item control page