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Pricing Flow Commodity Derivatives Using Fixed Income Market Techniques

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    (Institute for Operations Research and RiskLab, ETH Zentrum, CH-8092 Zurich, Switzerland)



    (Institute for Operations Research, ETH Zentrum, CH-8092 Zurich, Switzerland)

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    In this work, the valuation of energy-related financial contracts written on prices of flow commodities (such as natural gas, oil and electrical power) will be elaborated. Due to restrictions on storability of the underlying, the pricing of flow commodity derivatives is not trivial and thus correct valuation is still under discussion. In this paper, an axiomatic setting is followed, which provides a connection to interest rate theory, whose toolkit we utilize to consistently price frequently quoted flow commodity options such as caps, floors, collars and cross commodity spreads.

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

    Volume (Year): 09 (2006)
    Issue (Month): 08 ()
    Pages: 1299-1321

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    Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:08:p:1299-1321
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