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Modelling spikes and pricing swing options in electricity markets


Hambly, Ben; Howison, Sam; Kluge, Tino


Bitte beziehen Sie sich beim Zitieren dieses Dokumentes immer auf folgenden Persistent Identifier (PID):http://nbn-resolving.de/urn:nbn:de:0168-ssoar-221417

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Abstract Most electricity markets exhibit high volatilities and occasional distinctive price spikes, which result in demand for derivative products which protect the holder against high prices. In this paper we examine a simple spot price model that is the exponential of the sum of an Ornstein-Uhlenbeck and an independent mean reverting pure jump process. We derive the moment generating function as well as various approximations to the probability density function of the logarithm of the spot price process at maturity $T$. Hence we are able to calibrate the model to the observed forward curve and present semi-analytic formulae for premia of path-independent options as well as approximations to call and put options on forward contracts with and without a delivery period. In order to price path-dependent options with multiple exercise rights like swing contracts a grid method is utilised which in turn uses approximations to the conditional density of the spot process.
Klassifikation Wirtschaftssektoren; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Methode Theorieanwendung
Freie Schlagwörter Energy derivatives; Financial mathematics; Stochastic jumps; Numerical methods for option pricing; Continuous time models; Derivative pricing models
Sprache Dokument Englisch
Publikationsjahr 2009
Seitenangabe S. 937-949
Zeitschriftentitel Quantitative Finance, 9 (2009) 8
DOI http://dx.doi.org/10.1080/14697680802596856
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)