********************************************************************

                                                     Seminar

             Department of Systems Engineering and Engineering Management
The Chinese University of Hong Kong

------------------------------------------------------------------------------------------

Title	:	Stochastic Modeling and Option Pricing in Commodity Markets
Speaker	:	Mr. Lingfei LI
		Department of Industrial Engineering and Management Sciences
		Northwestern University
Date	:	Dec. 13th, 2011 (Tuesday)
Time	:	11:15 a.m. - 12:15 p.m.
Venue	:	Room 513
		William M.W. Mong Engineering Building
		(Engineering Building Complex Phase 2)
		CUHK

------------------------------------------------------------------------------------------

Abstract:

I will construct a new class of analytically tractable commodity models that capture stylized empirical facts based on subordinate Ornstein-Uhlenbeck (SubOU) processes, i.e. OU diffusions time changed by independent Levy subordinators. This class of models, being consistent with the initial futures curve, possesses mean-reverting jumps and exhibits the well known maturity effect for futures prices. European and Bermudan style futures option prices are computed by eigenfunction expansions.  American option prices are then obtained by extrapolating Bermudan prices to the limit via Richardson extrapolation. It is shown using market data that these models are flexible enough to capture implied volatility smile patterns observed in commodity futures options. This class of models can also be used as input models for real option applications as well as problems in supply chain management such as procurement and inventory strategies.

The eigenfunction expansion method developed for SubOU processes can also be generalized to solve optimal stopping problems of symmetric Hunt processes (SHP). This is a very rich class of Markov processes that cover many financial applications. In the end of this talk, I will briefly sketch the methodology and talk about some particular applications of SHP in finance.

-------------------------------------------------------------------------------------------

Biography:

Lingfei Li is currently a PhD candidate in the Department of Industrial Engineering and Management Sciences at Northwestern University. He received his B.S. in Applied Mathematics from Peking University in 2007 and was named Chun-Tsung scholar. While at Northwestern, he was awarded the Arthur Hurter prize for academic excellence. In the summer of 2009, he worked as an associate with Morgan Stanley’s Commodity Strategies Group, where he was responsible for model development and testing. His research interests include applied probability, financial engineering, mathematical and computational finance. He will receive his PhD in May 2012.

************************* ALL ARE WELCOME ************************

Host	:	Prof. Duan Li
Tel	:	(852) 3943-8316/8323
Email	:	dli@se.cuhk.edu.hk
Enquiries	:	Prof. Nan Chen or Prof. Sean X. Zhou
	:	Department of Systems Engineering and Engineering Management
		CUHK
Website	:	http://www.se.cuhk.edu.hk/~seem5201
Email	:	seem5201@se.cuhk.edu.hk

********************************************************************