A note on arbitrage-free pricing of forward contracts in energy markets

Fred Espen Benth, Lars Ekeland, Ragnar Hauge and BjøRn Fredrik Nielsen

Applied Mathematical Finance, 2003, vol. 10, issue 4, 325-336

Abstract: Arbitrage theory is used to price forward (futures) contracts in energy markets, where the underlying assets are non-tradeable. The method is based on the so-called 'fitting of the yield curve' technique from interest rate theory. The spot price dynamics of Schwartz is generalized to multidimensional correlated stochastic processes with Wiener and Levy noise. Findings are illustrated with examples from oil and electricity markets.

Keywords: incomplete markets; forward pricing; energy markets; no-arbitrage pricing; Levy processes (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (27)

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DOI: 10.1080/1350486032000160777

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