

Bachelier – a strange new world for oil options
Model tuned to negative prices has implications for pricing, margining and delta hedging
A single, wild trading day in April upset decades of established options pricing practice in oil markets.
When the price of West Texas Intermediate (WTI) oil futures traded at CME plummeted to -$40 a barrel on April 20, the Black-Scholes options pricing model – which cannot compute negative prices – was pushed to its theoretical limits.
CME responded on April 22 by switching to the 120-year old Bachelier options pricing model, which can accept negative prices. Ice Clear Europe followed suit
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