In recent years some organized markets have appeared for forward contracts and options on these contracts. This paper briefly reviews the organization of trade in a centralized forward market. Assuming a friction-free market with constant interest rate, a consistent and continuous time framework is built for the valuation and hedging of options on a forward or a futures contract. This framework takes into account the peculiarities of a forward/futures contract. In this framework the paper analyzes the pricing and hedging of options on a forward contract and reconsiders the Black-76 model for the pricing and hedging of options on a futures contract.

Futures markets and forward markets have for long played an important role in economics. It is widely believed that futures markets are organized markets while forward markets are over-the-counter (bilateral) markets. Options on commodity futures contracts have a long history and the valuation of options on futures contracts has received considerable attention in economic literature. In a very influential paper, Black (1976) provided a complete description of forward and futures contracts and presented a model for pricing an option on a futures commodity contract in a friction-free market. In contrast, one usually believes that options on forward contracts are non- traded assets, but merely are “useful theoretical constructs”

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