An integrated optimisation model for pricing and hedging oil derivatives

Abstract This paper develops an integrated optimisation model for pricing and hedging oil derivatives in incomplete markets where available market quotes and the trader’s views, inventory and risk aversion may affect the pricing. The model is well suited for practical applications such as the design of optimal cross-hedging strategies and the market-maker problem of pricing derivatives while managing inventory risk in illiquid market conditions. We use numerical experiments to illustrate the mod