Just wondering if anyone has any pricing models or technical explanations of the mechanics for pricing OTC base metal forwards and options. Due to the averaging nature and the fact that forward contracts are priced off the 3rd wednesday there are some complications to how an asian style option can be used for this. Any assitance would be greatly appreciated.

I'm no expert in base metal forwards and options, but my impression is that to do it right you need to understand factors relating to production, storage and shipping, as in other commodities; people seem to then relate these factors to a principal component analytical approach to modelling the forward curve. That is, they look at something like the first four principal components (shift, tilt, bow and flex) and gain intuition as to how each of these moves with things like the elasticity of metal production or consumption.I think there is basically a long-term equilibrium price that comes from the average economics of metal production over the long term, and then there is the current spot situation (high demand). The forward curve model effectively interpolates between these two in a hopefully realistic way.Once you have your forward curve model, I guess you should be able to price Asian options either by simulation (imagine simulating "asian option payoff" minus "basket of european option payoffs expiring on every asian setting date") or by analytic approximations.

QuoteOriginally posted by: toddrossforward contracts are priced off the 3rd wednesday there are some complications to how an asian style option can be used for this. Any assitance would be greatly appreciated.But Asians options written on LME Base metal prices will average the spot cash contract price over a particular calendar period in my experience.

QuoteOriginally posted by: toddrossforward contracts are priced off the 3rd wednesday there are some complications.Why would the third wednesday of the month add any more difficulty to modeling the metals forward curve than the expiration schedules of Brent and WTI futures on those curves?Surely the most important thing when modelling evolution of forward prices for a commodity through time are tying the macro factors such as supply, stockpile, seasonality etc to the shaping of the curve as erstwhile pointed out.However one thing to bear in mind is that the forward curve already incoroprates market particpants best guesses of all these factors into its structure (ie if copper for delivery in fifteen months is worth $X /tonne on the LME then that is what the market expects to see the price at in 15months so if you have a forward written on copper for delivery in fifteen months time then its value should be that figure suitably discounted). I think maybe the question you are asking is if I have a foward on 3month copper today and what is the best way to approximate 3month copper prices tomorrow, correct?