A 'simple' hybrid model for power derivatives
Date
2009
Authors
Lyle, M.
Elliott, R.
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Journal article
Citation
Energy Economics, 2009; 31(5):757-767
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Matthew R. Lyle, Robert J. Elliott
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Abstract
This paper presents a method for valuing power derivatives using a supply-demand approach. Our method extends work in the field by incorporating randomness into the base load portion of the supply stack function and equating it with a noisy demand process. We obtain closed form solutions for European option prices written on average spot prices considering two different supply models: a mean-reverting model and a Markov chain model. The results are extensions of the classic Black-Scholes equation. The model provides a relatively simple approach to describe the complicated price behaviour observed in electricity spot markets and also allows for computationally efficient derivatives pricing.
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Copyright © 2009 Elsevier B.V. All rights reserved.
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Copyright 2009 Elsevier B.V.