Efficient Pricing of Energy Derivatives

I present a tractable framework, first developed in Trolle and Schwartz (2009), for pricing energy derivatives in the presence of unspanned stochastic volatility. Among the model features are i) a perfect fit to the initial futures term structure, ii) a fast and accurate Fourier-based pricing formula for European-style options on futures contracts, enabling efficient calibration to liquid plain-vanilla exchange-traded derivatives, and iii) the evolution of the futures curve being described in terms of a low-dimensional affine state vector, making the model ideally suited for pricing complex energy derivatives and real options by simulation. I also consider an extension of the framework that takes jumps in spot prices into account.


Published in:
Energy Pricing Models, 21
Year:
2014
Publisher:
Palgrave Macmillan US
ISBN:
978-1-137-37734-0
Keywords:
Laboratories:




 Record created 2018-03-07, last modified 2019-10-07


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