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Pricing Of Exotic Energy Derivatives Based On Arithmetic Spot Models

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  • FRED ESPEN BENTH

    (Centre of Mathematics for Applications (CMA), University of Oslo, P.O. Box 1053, Blindern, N0316 Oslo, Norway)

  • RODWELL KUFAKUNESU

    (University of Pretoria, Department of Mathematics and Applied Mathematics, Pretoria 0002, South Africa)

Abstract

Based on a non-Gaussian Ornstein–Uhlenbeck model for energy spot, we derive prices for Asian and spread options using Fourier techniques. The option prices are expressed in terms of the Fourier transform of the payoff function and the characteristic functions of the driving noises, being independent increment processes. In many relevant situations, these functions are explicitly available, and fast Fourier transform can be used for efficient numerical valuation. The arithmetic nature of our model implies that only a one-dimensional Fourier transform is required in the computation of the price, contrary to geometric models where transformation along both underlying variables is necessary.

Suggested Citation

  • Fred Espen Benth & Rodwell Kufakunesu, 2009. "Pricing Of Exotic Energy Derivatives Based On Arithmetic Spot Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 491-506.
    • Handle: RePEc:wsi:ijtafx:v:12:y:2009:i:04:n:s0219024909005324
    DOI: 10.1142/S0219024909005324
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    References listed on IDEAS

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    1. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Science and Technology, number hsbook0601, December.
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    Cited by:

    1. Piccirilli, Marco & Schmeck, Maren Diane & Vargiolu, Tiziano, 2021. "Capturing the power options smile by an additive two-factor model for overlapping futures prices," Energy Economics, Elsevier, vol. 95(C).
    2. 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.
    3. Bannör, Karl & Kiesel, Rüdiger & Nazarova, Anna & Scherer, Matthias, 2016. "Parametric model risk and power plant valuation," Energy Economics, Elsevier, vol. 59(C), pages 423-434.
    4. Benth, Fred Espen & Kiesel, Rüdiger & Nazarova, Anna, 2012. "A critical empirical study of three electricity spot price models," Energy Economics, Elsevier, vol. 34(5), pages 1589-1616.

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