A note on the design of commodity option contracts: a reply

The straightforward results of 2 option pricing models - the Black-Scholes (1973) model and the Black (1976) model - indicate that they are merely transformations of each other. If the assumptions underlying the 1973 model held for commodities, their equation would also hold for commodity options. McDonald and Siegel (1983) suggest that only the Black model is valid. The application of the 2 models to pricing options on physicals and options on futures is explained more fully, with emphasis on: 1. pricing commodity options in efficient markets, 2. pricing when the market is not ''full carry,'' and 3. early exercise considerations. European options on futures or physicals can be priced using either equation. If the assumptions underlying both models are met, either can be used with independent estimates of their respective parameters. If the assumptions in one market are not met, the market where the model assumptions hold will be correct.