COMMpractitionermodel
Black-76
Option pricing on forwards under lognormal forward dynamics.
01Intuition
Build the mental model first.
Price the option on the forward and discount the expected payoff back to today.
ONE-LINE DEFINITION
Option pricing on forwards under lognormal forward dynamics.
02Mathematics
Now make it exact.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
03Assumptions
Every model has a price.
01
Educational conventions are stated explicitly and may simplify market quotation or settlement details.
02
Rates are continuously compounded unless the section says otherwise.
03
Inputs are deterministic in the base model.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
04Market use
Why a quant cares.
Common baseline for commodity, caplet and swaption quotation contexts.
Intuition→Mathematics→Implementation→Desk risk
05Desk view
FRONT OFFICE VIEW
The hedge has opinions.
Start with the quote convention, then ask which COMM risk survives the hedge. A number without its convention is merely well-dressed ambiguity.
Ask Bateman about this model →06Related