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A note on arbitrage-free pricing of forward contracts in energy markets

Author

Listed:
  • Fred Espen Benth
  • Lars Ekeland
  • Ragnar Hauge
  • BjøRn Fredrik Nielsen

Abstract

Arbitrage theory is used to price forward (futures) contracts in energy markets, where the underlying assets are non-tradeable. The method is based on the so-called 'fitting of the yield curve' technique from interest rate theory. The spot price dynamics of Schwartz is generalized to multidimensional correlated stochastic processes with Wiener and Levy noise. Findings are illustrated with examples from oil and electricity markets.

Suggested Citation

  • Fred Espen Benth & Lars Ekeland & Ragnar Hauge & BjøRn Fredrik Nielsen, 2003. "A note on arbitrage-free pricing of forward contracts in energy markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(4), pages 325-336.
    • Handle: RePEc:taf:apmtfi:v:10:y:2003:i:4:p:325-336
    DOI: 10.1080/1350486032000160777
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