Univariate GARCH Model for Futures Option Pricing: Application to Silver Mini Futures in Indian Commodity Market

Abstract

This research investigates the pricing of options related to silver commodity futures within the Indian market, employing a standard univariate Generalized Autoregressive Conditional Heteroscedastic (GARCH) model with a symmetric normal distribution for return modelling. The study evaluates the performance of this option pricing model specifically for silver mini futures options traded on the Multi Commodity Exchange. Furthermore, it compares the option prices determined using the GARCH model parameters with those calculated using the Black-76 model. The findings demonstrate that the option prices derived from the GARCH model fall consistently within the bid-ask price range and significantly outperform the Black-76 model in terms of option pricing accuracy. This underscores the practical utility of GARCH models in the context of the Indian commodity market. To the best of our knowledge, this research marks the pioneering attempt to incorporate parameters generated by the GARCH model for futures option pricing within the Indian commodity market. © © 2024 by SCITEPRESS - Science and Technology Publications, Lda.