PRICING OF EXOTIC ENERGY DERIVATIVES BASED ON ARITHMETIC SPOT MODELS

Fred Espen Benth () and Rodwell Kufakunesu ()
Additional contact information
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

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 04, 491-506

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.

Keywords: Energy markets; spread options; Asian options; fast Fourier transform; non-Gaussian Ornstein–Uhlenbeck processes; independent increment processes (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024909005324
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:12:y:2009:i:04:n:s0219024909005324

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024909005324

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().