Approximate Recursive Valuation of Electricity Swing Options
نویسنده
چکیده
Pricing options on electrical power is important because of the worldwide trend toward deregulated electricity markets. It is fascinating because of the exotic nature of most power derivatives and because of the many unique features of electricity markets. One of these unique features is that electrical power cannot, in appreciable quantities, be stored. While this plays havoc with arbitrage-free pricing strategies, non-storability and the near inelasticity of electricity demand over short times make possible the supply-demand modelling of electricity spot prices. We use these insights to create an approximate pricing model for electricity spot prices and use this model to approximate the early exercise boundary for simple swing options.
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