Hedging Electricity Swing Options in Incomplete Markets

The deregulation of electricity markets renders public utilities vulnerable to the high volatility of electricity spot prices. This price risk is effectively mitigated by swing options, which allow the option holder to buy electric energy from the option writer at a fixed price during a prescribed time period. Unlike many financial derivatives, a swing option cannot be assigned a unique fair value due to market frictions. In this paper we determine the option's no-arbitrage price interval by hedging its payoff stream with basic market securities (such as forward contracts) both from the perspective of the holder and the writer of the option. The end points of the no-arbitrage interval are given by the optimal values of two robust control problems, which we solve in polynomial decision rules via constraint sampling.

Bittanti, Sergio
Cenedese, Angelo
Zampieri, Sandro
Published in:
Proceedings of the 18th IFAC World Congress, 18, 1, 846-853
Presented at:
18th IFAC World Congress, Università Cattolica del Sacro Cuore, Milano, Italy, August 2011

 Record created 2014-01-29, last modified 2020-10-28

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