Extrapolation of Crude Oil Futures Implied Return by Black Scholes Model and Monte Carlo Simulation

Abstract

Since the global COVID-19 outbreak in 2020, central banks around the world have adopted loose monetary policies to hedge against the downward pressure on the economy through quantitative easing. With the gradual increase in the number of currencies, from the beginning of 2022, global commodity prices began to rise continuously. Among them, the price of fossil fuels such as oil has hit record highs due to the intensification of geopolitical conflict between Russia and Ukraine. During this period, as the divergence in oil prices intensified, speculation opportunities in the derivatives market also emerged one after another. [1] Therefore, in this article, the principles of two pricing models, the Black Scholes Model and the Monte Carlo Model, are used to predict the price trend of Crude oil in the future. The implied volatility calculated according to the Black Scholes model will be used as the volatility of the oil futures price trend in the Monte Carlo model, and the current option premium will be used to reverse the implied return in the Monte Carlo simulation. It serves as a forecast of future yields for oil futures. By using the data from March to September 2022, the correlation coefficient between the predicted return and the actual return is 0.67, which is a relatively convincing prediction accuracy. However, the volatility of the predicted return will be higher than the actual return due to factors such as the volatility smile.