Research on the Commodity Pricing Based on Black-Scholes model and Geometric Brownian Motion model

Abstract

Commodity prices are never easy to forecast in the actual world. To acquire the pricing of commodity options, the price of the underlying commodity should always be anticipated using the commodity future, rather than simulating the price directly. Thus this paper is aimed to directly simulate the commodity price and compare this method to the standard way. The research method are as follows: firstly, collect the original data, then simulate the stock price by using the Black-Scholes model and simulate the commodity price by using the Geometric Brownian Motion model. Last, compare the result. The outcome demonstrates that the stock price may be successfully simulated using the Black-Scholes model using crude oil commodities futures as the underlying asset. The Geometric Brownian Motion model, however, is unable to accurately price commodities directly. This finding implies that it is incorrect to see commodities as a type of financial asset and that models used to value financial assets cannot accurately value commodities.