The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets

Kemper A, Schmeck MD, Khripunova Balci A (2020) Center for Mathematical Economics Working Papers; 635.
Bielefeld: Center for Mathematical Economics.

Diskussionspapier | Veröffentlicht | Englisch
 
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Abstract / Bemerkung
In electricity markets, futures contracts typically function as a swap since they deliver the underlying over a period of time. In this paper, we introduce a market price for the delivery periods of electricity swaps, thereby opening an arbitrage-free pricing framework for derivatives based on these contracts. Furthermore, we use a weighted geometric averaging of an artificial geometric futures price over the corresponding delivery period. Without any need for approximations, this averaging results in geometric swap price dynamics. Our framework allows for including typical features as the Samuelson effect, seasonalities, and stochastic volatility. In particular, we investigate the pricing procedures for electricity swaps and options in line with Arismendi et al. (2016), Schneider and Tavin (2018), and Fanelli and Schmeck (2019). A numerical study highlights the differences between these models depending on the delivery period.

JEL CLASSIFICATION: G130 ; Q400
Stichworte
Electricity Swaps; Delivery Period; Market Price of Delivery Risk; Seasonality; Samuelson Effect; Stochastic Volatility; Option Pricing; Heston Model
Erscheinungsjahr
2020
Band
635
ISSN
0931-6558
Page URI
https://pub.uni-bielefeld.de/record/2943342

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Kemper A, Schmeck MD, Khripunova Balci A. The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets. Center for Mathematical Economics Working Papers. Vol 635. Bielefeld: Center for Mathematical Economics; 2020.
Kemper, A., Schmeck, M. D., & Khripunova Balci, A. (2020). The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets (Center for Mathematical Economics Working Papers, 635). Bielefeld: Center for Mathematical Economics.
Kemper, A., Schmeck, M. D., and Khripunova Balci, A. (2020). The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets. Center for Mathematical Economics Working Papers, 635, Bielefeld: Center for Mathematical Economics.
Kemper, A., Schmeck, M.D., & Khripunova Balci, A., 2020. The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets, Center for Mathematical Economics Working Papers, no.635, Bielefeld: Center for Mathematical Economics.
A. Kemper, M.D. Schmeck, and A. Khripunova Balci, The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets, Center for Mathematical Economics Working Papers, vol. 635, Bielefeld: Center for Mathematical Economics, 2020.
Kemper, A., Schmeck, M.D., Khripunova Balci, A.: The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets. Center for Mathematical Economics Working Papers, 635. Center for Mathematical Economics, Bielefeld (2020).
Kemper, Annika, Schmeck, Maren Diane, and Khripunova Balci, Anna. The Market Price of Risk for Delivery Periods: Pricing Swaps and Options in Electricity Markets. Bielefeld: Center for Mathematical Economics, 2020. Center for Mathematical Economics Working Papers. 635.
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2020-05-11T10:59:40Z
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