Wednesday, July 06, 2005

Pricing futures contracts and call options: examples from oil futures

Econbrowser: $100 a barrel-- what are the odds?

This is a wonderful practical essay on a complex topic. I was trying to figure out the other day how to price a real estate futures option -- I figured out fairly quickly that it was complex. This says why.

The expected price for oil, based on the option calculation, is about $60 in 6 months. About what it is now.

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