ALTERNATIVE MODELS OF UNCERTAIN COMMODITY PRICES FOR USE WITH MODERN ASSET PRICING METHODS

This paper provides an introduction to alternative models of uncertain commodity prices. A model of commodity price movements is the engine around which any valuation methodology for commodity production projec ts is built, whether discounted cash flow (DCF) models or the recently developed modern asset pricing (MAP) methods. The accuracy of the val uation is in part dependent on the quality of the engine employed. Thi s paper provides an overview of several basic commodity price models a nd explains the essential differences among them. We also show how fut ures prices can be used to discriminate among the models and to estima te better key parameters of the model chosen.