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This is the problem that I have been thinking about: I am interested in trading forward contracts and call options for delivery of some commodity at time T to satisfy a demand.
I can buy and sell contracts many times before T and at each time, I observe the forward price and call option price. How would you model this? One possibility would be
1) Assume a stochastic model of forward curve evolution => implies a spot price model as well.
2) Use theoretical formulas to compute call option prices at each t.
However, I would want to take into account the fact that there is some other noise in the observed call option prices over time (they don't necessarily have to match up with the assumed dynamics of the forward curve). Are there any papers that do this type of model? Any suggestions? Thanks.
I can buy and sell contracts many times before T and at each time, I observe the forward price and call option price. How would you model this? One possibility would be
1) Assume a stochastic model of forward curve evolution => implies a spot price model as well.
2) Use theoretical formulas to compute call option prices at each t.
However, I would want to take into account the fact that there is some other noise in the observed call option prices over time (they don't necessarily have to match up with the assumed dynamics of the forward curve). Are there any papers that do this type of model? Any suggestions? Thanks.
