Financial boundary conditions in a continuous model with discrete-delay for pricing commodity futures and its application to the gold market

• Published in: Chaos, solitons and fractals Vol. 187; p. 115476
• Main Authors: Gómez-Valle, Lourdes, López-Marcos, Miguel Ángel, Martínez-Rodríguez, Julia
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.10.2024
• Subjects: Boundary conditions; Commodity futures; Delay stochastic process; Gold market; Numerical simulation; Random partial differential equation; Gold market; Boundary conditions; Numerical simulation; Delay stochastic process; Random partial differential equation; Commodity futures
• ISSN: 0960-0779
• DOI: 10.1016/j.chaos.2024.115476

In this work, we approach the solution of a differential problem for pricing commodity futures when the spot price follows a stochastic diffusion process with memory, that is, it depends on two discrete times: the present instant and a delayed one. In this kind of models, a closed-form solution is not feasible to obtain and, in most of the cases, numerical methods should be applied. To this end, it is normal to introduce a bounded domain for the state variable, so suitable boundary conditions have to be established. The conditions based on mathematical reasons often introduce difficulties in the boundary and poor accuracy. Here, we propose new nonstandard boundary conditions based on some financial reasons and then, we face the numerical solution of the problem that arises. Some experiments are presented which show that the drawbacks in the behavior of the solutions are overcome, providing more accurate futures prices. This new procedure is implemented in order to obtain a more precise valuation of gold futures contracts traded on the Commodity Exchange Inc. (US). •We propose a new methodology for pricing commodity futures by means of a model with discrete delay in the stochastic process.•Financial boundary conditions are designed in order to valuate these futures.•A discretization procedure is adapted to approximate the PDE problem which results in.•The described technique provides excellent accuracy when applied to gold futures contracts.