Pricing of Energy Contracts: From Replication Pricing to Swing Options

Raimund M. Kovacevic and Georg Ch. Pflug ()
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Raimund M. Kovacevic: University of Vienna
Georg Ch. Pflug: ISOR and IIASA

Chapter Chapter 15 in Handbook of Risk Management in Energy Production and Trading, 2013, pp 387-411 from Springer

Abstract: Abstract The principle of replication or superhedging is widely used for valuating financial contracts, in particular, derivatives. In the special situation of energy markets, this principle is not quite appropriate and might lead to unrealistic high prices, when complete hedging is not possible, or to unrealistic low prices, when own production is involved. Therefore we compare it to further valuation strategies: acceptability pricing weakens the requirement of almost sure replication and indifference pricing accounts for the opportunity costs of producing for a considered contract. Finally, we describe a game-theoretic approach for valuating flexible contracts (swing options), which is based on bi-level optimization.

Keywords: Cash Flow; Strike Price; Incomplete Market; Financial Contract; Indifference Price (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-1-4614-9035-7_15

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DOI: 10.1007/978-1-4614-9035-7_15

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