Pricing of energy contracts: From replication pricing to swing options

Kovacevic RM & Pflug GC (2013). Pricing of energy contracts: From replication pricing to swing options. In: Handbook of Risk Management in Energy Production and Trading. Eds. Kovacevic, RM, Pflug, GC & Vespucci, MT, pp. 387-411 USA: Springer. DOI:10.1007/978-1-4614-9035-7_15.

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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.

Item Type: Book Section
Research Programs: Risk, Policy and Vulnerability (RPV)
Risk & Resilience (RISK)
Bibliographic Reference: In: RM Kovacevic, GC Pflug, MT Vespucci (Eds); Handbook of Risk Management in Energy Production and Trading; Springer US pp.387-411
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Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 08:49
Last Modified: 04 Apr 2016 10:15
URI: http://pure.iiasa.ac.at/10573

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