The impact of negative pricing

Negative pricing and option models in KRM22 Risk Management systems


April 30, 2020

When oil futures prices went negative last week, it was the biggest shock in years in the oil market. Now, though, the market isn’t just accepting that as a one-time event. There are increasing signs that traders fully anticipate the same thing happening in June. – Avi Salzman – Barron’s

As part of our mission to bring increased visibility and lower cost risk management to capital market organizations, we want to make you aware the choices you have to manage negatively priced assets in our software products.

We are recommending utilizing a “Normal Distribution Model” or “Bachelier Model” to correctly assess the risk inherit in the recent price action in Crude Oil and its related options.  These models currently exist in our applications and your local KRM22 support team can help you implement them if you require assistance.

This change from a log-normal futures model (“Whaley Futures” model for American Style options and “Black Futures” for Euro Style options) will allow users to value and evaluate the risk of negative Crude Oil prices and negative Crude Oil option strikes. The model will also allow Risk Slide shocks to breach the zero-price barrier.

In addition, if you are carrying Crude Oil APO’s, we will soon be releasing a new Normal Distribution APO Model, which will accommodate both negative prices and negative strikes. The model will also allow Risk Slide shocks to breach the zero-price barrier for APO contracts. We expect to release this new model well before June’s contracts expire and will inform you of the availability as soon as it is ready for production