A closed-form solution for the price of cross-commodity electricity derivatives

D. Tsitakis, S. Xanthopoulos and A.N. Yannacopoulos

Physica A: Statistical Mechanics and its Applications, 2006, vol. 371, issue 2, 543-551

Abstract: We present a method for the valuation of two types of cross-commodity electricity options, European spark spread options and locational spread options. Since the underlying assets here are non-tradeable, the methodology of Black–Scholes–Merton cannot be directly applied. Nevertheless, assuming only absence of arbitrage we provide a closed-form analytic formula for the price of the derivatives in the case where the spot prices of the underlying process follow an exponential Ornstein–Uhlenbeck process.

Keywords: Energy derivatives valuation; Closed-form solutions; Exponential Ornstein–Uhlenbeck process (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:371:y:2006:i:2:p:543-551

DOI: 10.1016/j.physa.2006.03.037

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