Pricing electricity risk by interest rate methods
نویسندگان
چکیده
We address a method for pricing electricity contracts based on valuation of ability to produce power, which is considered as the true underlying for electricity derivatives. This approach shows that an evaluation of free production capacity provides a framework where a change–of–numeraire transformation converts electricity forward market into the common settings of money market modeling. Using the toolkit of interest rate theory, we derive explicit option pricing formulas. Submitted 20 February 2004, Final version 12 May 2004
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