Message-ID: <1465715505.760.1561617694842.JavaMail.zibwiki@www03.zib.de> Subject: Exported From Confluence MIME-Version: 1.0 Content-Type: multipart/related; boundary="----=_Part_759_1344657855.1561617694841" ------=_Part_759_1344657855.1561617694841 Content-Type: text/html; charset=UTF-8 Content-Transfer-Encoding: quoted-printable Content-Location: file:///C:/exported.html Pricing Problem

Pricing Problem

Mathematical models

Together with long term bilateral contrac= ts, other - possibly additional - ways of managing = various risks can be considered by a producer. Indeed he can also buy or se= ll financial instruments, such as derivatives. The simplest form of derivat= ives are the call and the put which may be specialized for the electricity commodity. They tipically gi= ve the right (but not the obligation) to sell or buy a certain amount of en= ergy at a given price. The price of this option is the strike price.  = Other, more sophisticated, options do exist, for instance a combination of = both usually named a collar or other such as s= wing options. In choosing this options, two fundamental problems arise:

1. from the selling side, the pricing, i.e. how much is the value of= the instrument.
2. From the buying side, the portfolio optimization, i.e. given a= set of proposed derivatives, decide which one to buy and if/when to exerci= se them.

Modeling and alg= orithmic considerations

The pricing problem can be solved in a closed form with the well-known <= a href=3D"https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model" class= =3D"external-link" rel=3D"nofollow">Black and Sholes (B&S) approach= that has been criticized by various authors. However in the c= ontext of the electricity market more advanced pricing models may be useful= . A recent and interesting approach is based on robust optimization models.= Indeed, as the classical B&S approach, the option pricing problem is t= o replicate an option with a portfolio of underlying (available) securities= in each possible scenario, and therefore the robust valuation scheme propo= sed by some author is natural and conceptually sound. Therefore one ca= n use manageable robust optimisation linear programming problems, based on = a dynamic hedging strategy with a portfolio of electricity futures contract= s and cash (risk-free asset). The model can be used to find a risk-free bid= (buyer's) price of the swing option.

Contributor

Dr Fabrizio Lacalandra, QuanTek

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