Energy spot price models and spread options pricing
TLDR
In this paper, the authors construct forward price curves and value a class of two asset exchange options for energy commodities, and obtain closed form results for the forward prices in terms of elementary functions.Abstract:
In this article, we construct forward price curves and value a class of two asset exchange options for energy commodities. We model the spot prices using an affine two-factor mean-reverting process with and without jumps. Within this modeling framework, we obtain closed form results for the forward prices in terms of elementary functions. Through measure changes induced by the forward price process, we further obtain closed form pricing equations for spread options on the forward prices. For completeness, we address both an Actuarial and a risk-neutral approach to the valuation problem. Finally, we provide a calibration procedure and calibrate our model to the NYMEX Light Sweet Crude Oil spot and futures data, allowing us to extract the implied market prices of risk for this commodity.read more
Citations
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Asymptotic Pricing of Commodity Derivatives using Stochastic Volatility Spot Models
TL;DR: In this paper, the authors used singular perturbation theory to obtain approximate closed-form pricing equations for forward contracts and options on single and two-name forward prices, based on a fast mean-reverting stochastic volatility driving factor and leading to pricing results in terms of constant volatility prices.
Journal ArticleDOI
How Much Should We Pay for Interconnecting Electricity Markets? A Real Options Approach
TL;DR: In this paper, the authors derive no-arbitrage lower bounds for the value of an interconnector in terms of electricity futures contracts, and show valuations for different assumptions about the seasonal component of the spread, and different liquidity caps which proxy for the depth of the interconnected power markets.
Posted Content
Levy Based Cross-Commodity Models and Derivative Valuation
TL;DR: A new cross-commodity modeling framework which accounts for jumps and cointegration in prices and introduces a new derivative valuation methodology by working in Fourier space, tailored for mean-reverting models.
Journal ArticleDOI
How much should we pay for interconnecting electricity markets? A real options approach
TL;DR: In this article, the authors derive no-arbitrage lower bounds for the value of an interconnector in terms of electricity futures contract and find that, depending on the depth of the market, the jumps in the spread can account for between 1% and 40% of the total value of the interconnectors.
Journal ArticleDOI
Lévy-Based Cross-Commodity Models and Derivative Valuation
TL;DR: In this article, the Fourier space time-stepping algorithm is used for derivatives valuation in a cross-commodity setting, which is tailored for mean-reverting models.
References
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TL;DR: The Black-Scholes analysis of stock option prices was used in this paper to model the behavior of stock prices and the Yield Curve of stock options, as well as the Black's model for option pricing.
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Peter Carr,Dilip B. Madan +1 more
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Transform analysis and asset pricing for affine jump-diffusions
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