Linking futures and options pricing in the natural gas market

A robust model for natural gas prices should simultaneously capture the observed prices of both futures and options. While incorporating a seasonal factor in the convenience yield of the spot price effectively replicates forward curves, it proves insufficient for ac- curately modelling the options price surface. The latter is more sensitive to the volatility structure of the spot price process, which has a limited impact on futures pricing. In this paper, we analyse European natural gas spot, futures, and options prices throughout 2024 and propose a no-arbitrage model that integrates both a seasonal stochastic convenience yield and a local volatility factor. This framework enables a simultaneous and accurate fit of both forward curves and options prices.