Dear Portia,

I am not an expert in the Heston model but i recommend the following book: " The Heston Model and Its Extensions in Matlab and C# ". This book provides some Matlab codes on the Heston model.

Just in case, for natural gas data try to introduce seasonality effects in the stochastic differential equation you want to calibrate. Comparing with the current literature, it would be a relevant improvement.

Thank you Mario for your suggestions will consider that.

The challenge iam having is that Heston in the book has been implemented on equity options and other underlying and not commodities like gas and electricity i am modelling.Again my model if for short term like (daily,weekly futures)is it okay to assume that my model would not need to capture seasonality and spikes? is there literature on a model that has included all electricity features(spiky, seasonality,mean reversion and stochastic volatility) at once?

Calibration on futures prices is possible isn't? just as is it on option prices?Any research that has calibrated using futures prices?

There is a paper iam looking for:Power derivative by Geman and Eyedland(1998)

It is important, to realize , what option pricing originally is about: you have a market in which stock is traded, and then options, european or american, are written , and the vanilla options are traded liquidly, and always, when you have a market, prices arise because there is supply and demand. So, for instance the Black-Scholes model, an extremely robust model under disturbances, is used not to price, but to hedge options!! Just visit an option trader, and she will tell you! And eventually you have to ask yourself, what the purpose of your calibration is. This purpose is very important in determining, which models to use. So, in your case, why are you trying to estimate these prices? When you only have an academic question in mind, then my suggestion is, to address more relevant questions.

Hi Portia, To be more realistic you have to keep in mind that gas has strong seasonality. Electricity market is extremely diffucult to model as you can not store electricity and therefore regular assumptions of Black-Scholes world do not apply. Jumps are very typical in electricity market. I would probably take a look at Heston with jumps along other jump-diffusion local volatility modles

Hi J. W. Nieuwenhuis

thank you for your comment i intend to price the option so that i can used it to price a spark spread option for hedging purposes. Is that ok? On liquidity of energy options i do understand that there are less liquid than equities.There is a paper by Geman and Eyedland(1998) where Heston like was also used it is not in public domain though, if you have it please share.