Question
The Black-Scholes option pricing formula requires the underlying price to stay positive. Then, Black-Scholes cannot be used to price the Crude oil futures option when
The Black-Scholes option pricing formula requires the underlying price to stay positive. Then, Black-Scholes cannot be used to price the Crude oil futures option when Crude oil futures price go negative. How did the exchange solve the option pricing problem allowing negative underlying price? (Hint: exchange employed Bachelier model. You will be awarded a full mark by copying and paste the information from the website and provide in-text citations with references. We will get back to this piece of knowledge after we learn option pricing in week 7 and week 8.) (1 mark)
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