Abstract:
Abstract
In this thesis, we aim at investigating a model for option pricing to reduce the risks associated
with agricultural commodity price fluctuations in Ethiopia. The daily closed agricultural
commodity prices such as Washed Sidama class A Grade 3 (WSDA3) coffee price,
Unwashed Nekempti grade 5 (ULK5) coffee price, Whitish Humera Gondar Sesame Seed
Grade 3 (WHGS3) price and Whitish Wollega Sesame Seed Grade3 (WWSS3) prices,
which are obtained from Ethiopia commodity exchange (ECX) market, are used to study
the price movements. The nature of the log-return of these agricultural commodity prices
exhibit heavy tails and high kurtosis.
Jump diffusion models are used for modeling and option pricing of agricultural commodity
prices. The method of maximum likelihood estimation (MLE) is employed to estimate
the parameters for the models. The root mean square error(RMSE), the quantile-quantile
(Q-Q) plot and the method of non parametric fit with normal kernel are used to test the
validation of models. These tests indicate that the models fit very well to the observed
agricultural commodity price data. We followed martingale approach option pricing strategy
to reduce the risk caused by price fluctuation under risk neutral measure. Monte Carlo
simulation is used to find the option prices of agricultural commodity price. The small
changes in each parameter value are considered to test how much each parameter is sensitive
to the models. It is observed that the jump component parameters show great effect on
option prices. Different values are also taken for risk free interest rate to evaluate option
prices of commodity price. Thus, an increment in the interest rate will result in raising
the option prices and a decrement in the interest rate will yield in falling the option prices.
Therefore, from the empirical results, we conclude that the models perform efficiently for
modeling and option pricing of commodity prices to reduce the risk associated with price