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Energy Spot Price Models And Spread Options Pricing

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  • SAMUEL HIKSPOORS

    ()
    (Department of Statistics, University of Toronto, 100 St. George Street, Toronto, Canada M5S 3G3, Canada)

  • SEBASTIAN JAIMUNGAL

    ()
    (Department of Statistics, University of Toronto, 100 St. George Street, Toronto, Canada M5S 3G3, Canada; Mathematical Finance Program, University of Toronto, 219 – 720 Spadina Ave, Toronto, Canada M5S 2T9, Canada)

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    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.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 10 (2007)
    Issue (Month): 07 ()
    Pages: 1111-1135

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    Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:07:p:1111-1135

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    Related research

    Keywords: Energy markets; spread options; multi-factor jump-diffusions; transform methods;

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    Cited by:
    1. Álvaro Cartea & Carlos González-Pedraz, 2010. "How much should we pay for interconnecting electricity markets? A real options approach," Business Economics Working Papers wb103206, Universidad Carlos III, Departamento de Economía de la Empresa.

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