Pricing and valuation of carbon swap in uncertain finance market

Zhe Liu () and Yanbin Li ()
Additional contact information
Zhe Liu: North China Electric Power University
Yanbin Li: North China Electric Power University

Fuzzy Optimization and Decision Making, 2024, vol. 23, issue 3, No 1, 319-336

Abstract: Abstract It has become a consensus in the international community to actively address global climate change issues and strive to achieve carbon reduction. For this purpose, carbon finance market plays a significant role in reducing carbon emissions by providing financial mechanisms to support and incentivize emission reduction projects. As a type of carbon finance derivative, carbon swap is an agreement between two parties whereby a floating price is exchange for a fixed price for carbon emission right over a specified period. How to price carbon swap before signing, i.e., determine the fixed price in the swap contract, and valuate carbon swap during the life of the swap contract are key issues. Noting the fact that the underlying asset of carbon swap is carbon price, the primary task is to model carbon price reasonably. Due to the inherent challenges and uncertainties associated with pricing carbon, frequency stability is often not guaranteed, resulting in the failure of probability based methods. Thus, this paper characterizes the carbon price using uncertain differential equation under the framework of uncertainty theory, and derives swap pricing and valuation formulas. Estimations for unknown parameters in the proposed model are given. Finally, with carbon spot price in European Energy Exchange, real data analyses are documented to illustrate our proposed methods in details.

Keywords: Uncertainty theory; Carbon swap pricing; Carbon swap valuation; Uncertain differential equation (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10700-024-09423-z Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:fuzodm:v:23:y:2024:i:3:d:10.1007_s10700-024-09423-z

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10700

DOI: 10.1007/s10700-024-09423-z

Access Statistics for this article

Fuzzy Optimization and Decision Making is currently edited by Shu-Cherng Fang and Boading Liu

More articles in Fuzzy Optimization and Decision Making from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().