Hansen, Thomas Lyse (Dong A/S) Jensen, Bjarne Astrup (Department of Finance, Copenhagen Business School)
Abstract
It is a delicate matter to trade spot products and financial derivatives in energy markets. Op-posite to bond and stock markets, the underlying assets are real products and a significant part of the demand for them represents a real need for the products, which can only be substituted away with some difficulties or, in some cases, only in a prohibitively costly manner. This is particularly true in the spot market, where the demand is almost always met, but where the spot price processes can be quite different from the spot price processes conventionally used in the pricing of derivatives. This pattern of real demand is also the main reason for the existence of the well-known convenience yield in energy markets.
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Publisher Info
Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number
2004-10.
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