Publication

Hedging Electricity Swing Options in Incomplete Markets

2011
Conference Papers

Abstract

The deregulation of electricity markets renders public utilities vulnerable to the high volatility of electricity spot prices. This price risk is effectively mitigated by swing options, which allow the option holder to buy electric energy from the option writer at a fixed price during a prescribed time period. Unlike many financial derivatives, a swing option cannot be assigned a unique fair value due to market frictions. In this paper we determine the option's no-arbitrage price interval by hedging its payoff stream with basic market securities (such as forward contracts) both from the perspective of the holder and the writer of the option. The end points of the no-arbitrage interval are given by the optimal values of two robust control problems, which we solve in polynomial decision rules via constraint sampling.

Official source

https://infoscience.epfl.ch/entities/publication/d6c39252-9e10-4724-bb86-545a0bb544a5

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2011
Conference Papers

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/d6c39252-9e10-4724-bb86-545a0bb544a5

About this result

Related concepts (32)

Option style

In finance, the style or family of an option is the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options—as well as others where the payoff is calculated similarly—are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging.

Option (finance)

In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction.

Put option

In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the underlying), at a specified price (the strike), by (or on) a specified date (the expiry or maturity) to the writer (i.e. seller) of the put. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.

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