Showing papers on "Spot contract published in 2008"

Stochastic Modeling of Electricity and Related Markets

Abstract: A Survey of Electricity and Related Markets Stochastic Analysis for Independent Increment Processes Stochastic Models for the Energy Spot Price Dynamics Pricing of Forwards and Swaps Based on the Spot Price Applications to the Gas Markets Modeling Forwards and Swaps Using the Heath-Jarrow-Morton Approach Constructing Smooth Forward Curves in Electricity Markets Modeling of the Electricity Futures Market Pricing and Hedging of Energy Options Analysis of Temperature Derivatives.

Hedging Pressure and Futures Price Movements in a General Equilibrium Model

Abstract: Optimal futures hedging and equilibrium futures price bias are examined in a model characterized by two consumption goods, one of which has stochastically varying output, and where information arrives sequentially. Positive (negative) complementarity in consumer preferences promotes downward (upward) bias in the futures price viewed as a predictor of the later spot price. I demonstrate that the conclusion derived from partial equilibrium analysis - that when speculators are risk averse, risk premia are a function of hedging pressure - fails in the general equilibrium analysis, so long as there are no transaction costs. A counterexample is analyzed in which, as consumers' additive logarithmic preferences are varied, producers' hedging positions change from long to short, while the futures risk premium remains unchanged. However, hedging pressure is reinstated as a force influencing risk premia in the sense that the futures price is downward biased when hedgers take short positions and is upward biased when hedgers take long positions, provided it can be assumed (as is usually valid) that fixed setup costs of trading deter consumers more than producers from participating in the futures market.

Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity

Abstract: We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium.

Supply contracts in manufacturer‐retailer interactions with manufacturer‐quality and retailer effort‐induced demand

Abstract: We consider a decentralized distribution channel where demand depends on the manufacturer-chosen quality of the product and the selling effort chosen by the retailer. The cost of selling effort is private information for the retailer. We consider three different types of supply contracts in this article: price-only contract where the manufacturer sets a wholesale price; fixed-fee contract where manufacturer sells at marginal cost but charges a fixed (transfer) fee; and, general franchise contract where manufac- turer sets a wholesale price and charges a fixed fee as well. The fixed-fee and general franchise contracts are referred to as two-part tariff contracts. For each contract type, we study different contract forms including individual, menu, and pooling contracts. In the analysis of the different types and forms of contracts, we show that the price only contract is dominated by the general franchise menu contract. However, the manufacturer may prefer to offer the fixed-fee individual contract as compared to the general franchise contract when the retailer's reservation utility and degree of information asymmetry in costs are high. © 2008 Wiley Periodicals, Inc. Naval Research Logistics 55: 200-217, 2008

The price of power: The valuation of power and weather derivatives

Abstract: Pricing contingent claims on power presents numerous challenges due to (1) the unique behavior of power prices, and (2) time-dependent variations in prices. We propose and implement a model in which the spot price of power is a function of two state variables: demand (load) and fuel price. In this model, any power derivative price must satisfy a PDE with boundary conditions that reflect capacity limits and the non-linear relation between load and the spot price of power. Moreover, since power is non-storable and demand is not a traded asset, the power derivative price embeds a market price of risk. Using inverse problem techniques and power forward prices from the PJM market, we solve for this market price of risk function. During 1999–2001, the upward bias in the forward price was as large as $50/MWh for some days in July. By 2005, the largest estimated upward bias had fallen to $19/MWh. These large biases are plausibly due to the extreme right skewness of power prices; this induces left skewness in the payoff to short forward positions, and a large risk premium is required to induce traders to sell power forwards. This risk premium suggests that the power market is not fully integrated with the broader financial markets.

Linking Natural Gas Markets - Is LNG Doing its Job?

Abstract: The increase in liquefied natural gas trade has accelerated the integration of previously segmented markets in North America, Europe, and Asia. This paper provides evidence on the integration of the transatlantic natural gas market. We test the theoretical proposition that in integrating markets commodity prices should move closer than before. Using 2,059 pairs of daily spot prices for natural gas in North America and Europe we investigate price dynamics covering the period from 1999 until 2008. We apply the Kalman Filter technique to gain detailed information on trends inherent over time. Results suggest an increasing convergence of spot prices on either side of the Atlantic Basin.

When Supply Meets Demand: The Case of Hourly Spot Electricity Prices

Abstract: We use a supply-demand framework to model the hourly day-ahead price of electricity (the spot price) based on publicly available information. With the model we can forecast the level and probability of a spike in the spot price defined as the spot price above a certain threshold. Several European countries have recently started publishing day-ahead forecasts of the available supply. This paper shows this forecasted capacity is quite successful in predicting spot price movements 24 h ahead.

The Stochastic Behavior of Commodity Prices with Heteroskedasticity in the Convenience Yield

Abstract: We document a new stylized fact regarding the dynamics of the commodity convenience yield: the volatility of the convenience yield is heteroskedastic for industrial commodities; specically, the volatility (variance) of the convenience yield depends on the convenience yield level. To explore the economic and statistical signicance of the improved specication of the convenience yield process, we propose an affine model with three state variables (log spot price, interest rate, and the convenience yield). Our model captures three important features of commodity futures the heteroskedasticity of the convenience yield, the positive relationship between spot-price volatility and the convenience yield and the dependence of futures risk premium on the convenience yield. Moreover our model predicts an upward sloping implied volatility smile, commonly observed in commodity option market.

Modeling commodity prices under the CEV model

Abstract: Deregulation of energy commodity markets in the last decade, together with the growth of world consumption and the attractive returns on commodities over the period 2000-2007, has generated a dramatic increase in trading volumes and, in turn, spikes and random changes in the volatility of commodity spot prices. This article introduces the constant elasticity of variance (CEV) model for commodity prices and examines its calibration to four strategic commodity trajectory prices over the period 1990-2007 by using a Generalized Method of Moments. Six other models are compared to the CEV model by performing a test of goodness-of-fit. Estimating the model for crude oil, coal, copper, and gold and comparing the results during the sub-periods 1990-1999 and 2000-2007 shows that the constant elasticity of variance exponent can efficiently account for the stochastic volatility observed after 2000 in commodity prices. Moreover, the article exhibits that although mean-reverting processes well captured the pattern of commodity prices prevailing before 2000, they do not apply to the recent past.

Forecasting model for crude oil prices based on artificial neural networks

Abstract: This paper presents short-term forecasting model for crude oil prices based on three layer feedforward neural network. Careful attention was paid on finding the optimal network structure. Moreover, a number of features were tested as an inputs such as crude oil futures prices, dollar index, gold spot price, heating oil spot price and S&P 500 index. The results show that with adequate network design and appropriate selection of the training inputs, feedforward networks are capable of forecasting noisy time series with high accuracy.

Analytical pricing of discretely monitored Asian-style options: Theory and application to commodity markets

Abstract: We compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square-root price dynamics. This result, combined with the Fourier transform pricing method proposed by Carr and Madan [Carr, P., Madan D., 1999. Option valuation using the fast Fourier transform. Journal of Computational Finance 2(4), Summer, 61–73] allows us to derive a closed-form formula for the fair value of discretely monitored Asian-style options. Our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility. Four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae. Empirical results based on natural gas data from NYMEX and corn data from CBOT show a remarkable improvement over the main alternative techniques developed for pricing Asian-style options within the market standard framework of geometric Brownian motion.

An approach for optimal placement of static VAr compensators based on reactive power spot price

Abstract: Summary form only given. In this paper, a new reactive power spot price index (QSPI) has been suggested to determine the optimal location of static VAr compensator (SVC) in the power system. The proposed index has been computed at each bus based on the reactive power spot price under different loading conditions for the system intact and critical line outage contingency cases. The effectiveness of the proposed method has been tested on two practical Indian systems. The results show that the suggested method of SVC placement is effective in reducing the real and reactive power spot prices, generation cost, system real power loss, total wheeling charges, and enhancing the system loading margin during normal as well as critical contingency cases.

A Hybrid System-Econometric Model for Electricity Spot Prices: Considering Spike Sensitivity to Forced Outage Distributions

Abstract: With the current trend in deregulation, all electricity markets have been subject to volatile electricity prices, typically in peak season. As markets mature, new financial and operational risk management instruments are becoming available. In order to price such instruments, a model for the underlying price process is required. In this paper a hybrid model is described that contains aspects of the power system, as well as the historical time-series of spot prices observed in the market. By including both aspects of the problem, a model with both economic and system-based aspects is created. Its modular design allows easy adaptation to different markets based on generating system reliability, load patterns, and price histories. The spot price histories are manifest in two probability distributions for these prices, whereas the system specifics are included via load and generation models which are calibrated to the climate and system of interest.

Asymptotic Pricing of Commodity Derivatives using Stochastic Volatility Spot Models

Abstract: It is well known that stochastic volatility is an essential feature of commodity spot prices. By using methods of singular perturbation theory, we obtain approximate but explicit closed‐form pricing equations for forward contracts and options on single‐ and two‐name forward prices. The expansion methodology is based on a fast mean‐reverting stochastic volatility driving factor and leads to pricing results in terms of constant volatility prices, their Deltas and their Delta‐Gammas. Both the standard single‐factor mean‐reverting spot model and a two‐factor generalization, in which the long‐run mean is itself mean‐reverting, are extended to include stochastic volatility and each is analysed in detail. The stochastic volatility corrections can be used to efficiently calibrate option prices and compute sensitivities.

Commodity Futures Market in India: A Study of Trends in the Notional Multi-Commodity Indices

Abstract: The main purpose of the present study would be to look into some characteristics of the Indian commodity futures market in order to judge whether prices indicate efficient functioning of the market or otherwise, particularly as this market is less developed compared to the financial derivatives markets, being constrained by its chequered history with many policy reversals. Using the available notional price indices for the commodity market we find that multi-commodity indices, which have higher exposure to metals and energy products, with clear and efficient price dissemination in national and international markets, behave like the equity indices in terms of efficiency and flow of information. Both the contemporaneous futures and spot prices contribute to price discovery and the futures market can provide information for current spot prices and thus help to reduce volatility in the spot prices of the relevant commodities and provide for effective hedging of price risk. Agricultural indices on the other hand do not exhibit such features very clearly. Our results also help to build a case for opening up of parts of the Indian agricultural futures market.

Modelling Electricity Prices with Forward Looking Capacity Constraints

Abstract: We present a spot price model for wholesale electricity prices which incorporates forward looking information that is available to all market players. We focus on information that measures the extent to which the capacity of the England and Wales generation park will be constrained over the next 52 weeks. We propose a measure of 'tight market conditions', based on capacity constraints, which identifies the weeks of the year when price spikes are more likely to occur. We show that the incorporation of this type of forward looking information, not uncommon in the electricity markets, improves the modeling of spikes (timing and magnitude) and the different speeds of mean reversion.

Short-term electricity futures prices: evidence on the time-varying risk premium ∗

Abstract: This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange, Nord Pool. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the Nord Pool market around the end of year 2002, the variation of the risk premiums was related to the variance and the skewness of future spot prices. This result is consistent with the view that risk considerations played a role in the determination of futures prices. Finally, additional evidence provided throughout the paper supports the view that circumstances changed in the Nord Pool market after the shock period.

The Endogenous Price Dynamics of the Emission Allowances: An Application to CO2 Option Pricing

Abstract: Market mechanisms are increasingly being used as a tool for allocating somewhat scarce but unpriced rights and resources, such as air and water. Tradable permits have emerged as the most cost–effective measure leading to the emergence of both nationwide (SO2) and supranational (CO2) emission permits markets. By means of the dynamic optimization of companies which are covered by such environmental regulations, we develop an endogenous model for the emission permit spot price dynamics that also accounts for the presence of asymmetric information. In the model, the companies are characterized by exogenous pollution processes that, in the short term, are the underlying of the permit price dynamics. An extensive numerical exercise is carried out for the CO2 permit price in the European market. We introduce for the first-time in the current literature a CO2 option pricing model comparison. The option pricing method can be used for hedging purposes and for pricing CO2-linked projects and investments.

Price discovery in the options markets: An application of put-call parity

Abstract: This study investigates the relative rate of price discovery in Taiwan between index futures and index options, proposing a put-call parity (PCP) approach to recover the spot index embedded in the options premiums. The PCP approach offers the benefits of reducing model risk and alleviating the burden of volatility estimation. Consistent with the trading-cost hypothesis, a dominant tendency is found for futures and a subordinate but non-trivial price discovery from options. The relative weight of options price discovery is sensitive to the methodology employed as the means of inferring the option-implicit spot price. The empirical evidence suggests that the information contained in the PCP-implied spot encompasses that provided by the Black-Scholes-implied spot. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:354– 375, 2008

Optimization-Based Generation Asset Allocation for Forward and Spot Markets

Abstract: One of the most important daily decisions that a Genco has to make is to allocate generation assets between the forward and spot markets. That is, how much capacity should be contracted in the forward market and how much should be kept to bid in spot market? This paper focuses on generation asset allocation between monthly forward contracts, such as bilateral contracts, futures contracts, options contracts, and daily spot markets, considering operating costs and constraints of generating units, as well as spot price risk. The problem is to find the optimal hedging position based on the known forward price and the forecasted hourly spot prices and is formulated based on the model of PJM market. The double dynamic programming method is applied to solve this optimal asset allocation problem with all the short-term operating constraints of the generating unit satisfied. Three types of forward contracts that are commonly used in practice are considered and their impact on generation asset allocation are analyzed and compared. The analytic relationship between the optimal contract quantity of a particular type and spot generation is established. Based on this relationship, the applicability and characteristics of a particular type of contract are discussed. Furthermore, with the solution to the generation asset allocation problem as a basis, the pricing strategy in the forward market is analyzed. A Nash game model is established and an iterative process is developed to determine the equilibrium pricing of futures contracts. Numerical testing shows that the method for the generation asset allocation is effective. Various factors influencing the decision of generation asset allocation and the relationship between futures contract price and spot price are tested and analyzed.