A numerical method for pricing American option on Mercantile exchange (case study of wheat and soybean)

Subject Areas : Numeric Analyze

Rafi Hassani Moghaadam ¹ (Department of Economics, Damghan University)
Hanif Heidari ² (Department of Applied Mathematics, Damghan University, Damghan, Iran)
Seyed Rohollah Ahmadi Haji Abadi ³ (Department of Economics, Damghan University)
Abbas Ebrahimi ⁴ (Master of Financial Mathematics, Damghan University)

Received: 2021-09-17 Accepted : 2022-06-13 Published : 2022-10-23

Keywords: تفاضلات متناهی, بورس کالا, ارزش اختیار معامله, نوسان, اختیار آمریکایی,

Abstract :

American trading options are a way to manage risk in the commodity exchange. This method can be applied before maturity. The valuation of the American trading option in the finite difference method is less complicated than other methods and its calculation time is relatively short, and also with increasing the sample and increasing the volatility, the parameters are not disturbed. In this research, using the mentioned method, the American option for two products of wheat and rapeseed meal has been done and specified according to the data of Iran Commodity Exchange: A) The value of the American option for wheat and rapeseed meal is very small and negligible from the binomial tree method and the finite difference method calculated using the algorithm presented in the research and coding in MATLAB software. B) The American option value for wheat is higher than soybean meal for both options. The main reason for this is the high volatility (σ) of the base price of wheat stocks compared to rapeseed meal. C) The result of the effect of volatility change and price change on the value of the option, is in favor of volatility change. This indicates the importance of the volatility parameter in the valuation of options. Finally, it is suggested that considering that the American option is capable of applying before maturity ,in the iranian stock exchange for agricultural commodities is presented as one of the tools of risk management .

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