IDEAS home Printed from https://ideas.repec.org/a/wsi/ijtafx/v10y2007i07ns0219024907004573.html
   My bibliography  Save this article

Energy Spot Price Models And Spread Options Pricing

Author

Listed:
  • 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)

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.

Suggested Citation

  • Samuel Hikspoors & Sebastian Jaimungal, 2007. "Energy Spot Price Models And Spread Options Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(07), pages 1111-1135.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:07:n:s0219024907004573
    DOI: 10.1142/S0219024907004573
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219024907004573
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219024907004573?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Edward P. C. Kao & Weiwei Xie, 2017. "Pricing spread options by generalized bivariate edgeworth expansion," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(02n03), pages 1-30, June.
    2. Roncoroni, Andrea & Id Brik, Rachid, 2017. "Hedging size risk: Theory and application to the US gas market," Energy Economics, Elsevier, vol. 64(C), pages 415-437.
    3. Cartea, Álvaro & González-Pedraz, Carlos, 2012. "How much should we pay for interconnecting electricity markets? A real options approach," Energy Economics, Elsevier, vol. 34(1), pages 14-30.
    4. Deschatre, Thomas & Féron, Olivier & Gruet, Pierre, 2021. "A survey of electricity spot and futures price models for risk management applications," Energy Economics, Elsevier, vol. 102(C).
    5. Jun Maekawa & Koji Shimada, 2019. "A Speculative Trading Model for the Electricity Market: Based on Japan Electric Power Exchange," Energies, MDPI, vol. 12(15), pages 1-15, July.
    6. Wobben, Magnus & Dieckmann, Birgit & Reichmann, Oleg, 2012. "Valuation of physical transmission rights—An analysis of electricity cross-border capacities between Germany and the Netherlands," Energy Policy, Elsevier, vol. 42(C), pages 174-180.
    7. Mario Figueiredo & Yuri F. Saporito, 2023. "Forecasting the term structure of commodities future prices using machine learning," Digital Finance, Springer, vol. 5(1), pages 57-90, March.
    8. Thomas Deschatre & Olivier F'eron & Pierre Gruet, 2021. "A survey of electricity spot and futures price models for risk management applications," Papers 2103.16918, arXiv.org, revised Jul 2021.
    9. Max F. Schöne & Stefan Spinler, 2017. "A four-factor stochastic volatility model of commodity prices," Review of Derivatives Research, Springer, vol. 20(2), pages 135-165, July.
    10. Cartea, Álvaro & Jaimungal, Sebastian & Qin, Zhen, 2019. "Speculative trading of electricity contracts in interconnected locations," Energy Economics, Elsevier, vol. 79(C), pages 3-20.
    11. Andreis, Luisa & Flora, Maria & Fontini, Fulvio & Vargiolu, Tiziano, 2020. "Pricing reliability options under different electricity price regimes," Energy Economics, Elsevier, vol. 87(C).
    12. Kobari, L. & Jaimungal, S. & Lawryshyn, Y., 2014. "A real options model to evaluate the effect of environmental policies on the oil sands rate of expansion," Energy Economics, Elsevier, vol. 45(C), pages 155-165.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:ijtafx:v:10:y:2007:i:07:n:s0219024907004573. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ijtaf/ijtaf.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.