CME changes option pricing model to accommodate negative crude oil, reports Daniel Collins.
On Monday, I got a text from a former colleague asking me how is it possible for crude oil to go negative?
I had not yet seen that the May crude oil contract had moved into negative territory but understood the pressure it was under. I responded that it probably had to do with the lack of storage capacity and the fact that crude was rolling from its May contract to June.
Thursday the CME Group alerted Clearing Members, CFOs and back office managers that it was switching its options pricing and valuation model to Bachelier (from Black Scholes) to accommodate negative prices.
The Bachelier model allows for negative option pricing and has been utilized in Europe for interest rates contracts that have traded in negative territory.
Here is the CME Group Announcement
CME Group
TO: Clearing Member Firms Chief Financial Officers Back Office Managers
FROM: CME Clearing
ADVISORY #: 20-171
SUBJECT: Switch to Bachelier Options Pricing Model
DATE: April 21st, 2020
Pursuant to Clearing Advisory 20-152 that was published on April 8th, the clearing house will switch the options pricing and valuation model to Bachelier to accommodate negative prices in the underlying futures and allow for listing of option contracts with negative strikes for the set of products specified below.
The switch will be effective for the margin cycle run at the end of trading tomorrow April 22, 2020 and will remain in place until further notice.
Should you have any questions, please contact CME Clearing Risk Management at Clearing.RiskManagement@cmegroup.com or 312-648-3888 or CME Clearing Pricing & Valuations at OTCPricing&ValuationsFnOTeam@cmegroup.com.
Product F/O Clearing Code
Globex Code
Group
