Analytical Approximation for the Price Dynamics of Spark Spread Options
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Fred E Benth
This paper presents an analytic approximation for the pricing dynamics of spark spread options in terms of Fourier transforms. We propose to model the spark spread, that is, the price difference of electricity and gas, directly using a mean-reverting model with diffusion and jumps. The model is analyzed empirically, and shown to fit observed data in the UK reasonably well. The main advantage with the model is that the spark spread of electricity and gas forwards, being forwards with delivery over periods, can be priced analytically. The price dynamics for different spark spread options with electricity and gas forwards as underlying, is analytically derived through Fourier transforms. These pricing expressions allow for efficient numerical valuations via the fast Fourier transform technique.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Analysis and Modelling of Electricity Futures Prices
- Risk Premia in Electricity Forward Prices
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Artikel in diesem Heft
- Article
- Directional Congestion and Regime Switching in a Long Memory Model for Electricity Prices
- Point and Interval Forecasting of Spot Electricity Prices: Linear vs. Non-Linear Time Series Models
- The Nature of Power Spikes: A Regime-Switch Approach
- Risk Management and the Role of Spot Price Predictions in the Australian Retail Electricity Market
- Randomly Modulated Periodic Signals in Alberta's Electricity Market
- Analysis and Modelling of Electricity Futures Prices
- Risk Premia in Electricity Forward Prices
- Analytical Approximation for the Price Dynamics of Spark Spread Options
- Estimating Trends in Weather Series: Consequences for Pricing Derivatives
- Measuring and Testing Natural Gas and Electricity Markets Volatility: Evidence from Alberta's Deregulated Markets
