Papers by Lutz von Grafenstein
Quantitative Finance, 2005
We address a method for pricing electricity contracts based on valuation of ability to produce po... more 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.
We discuss a micro-economically inspired model for the prices of futures contracts for the delive... more We discuss a micro-economically inspired model for the prices of futures contracts for the delivery of electrical power. Such financial markets have been created to stimulate the competition in these sectors. All participants to the power market, producers as well as providers, are here considered on an aggregated basis and all of them have access to one and the same exchange for financial futures contracts. In our setup, providers seek to cover the expected demand over a future time period, modelled by means of a diffusion process. The present framework provides a description for both the open interest and prices for power futures as observed in real markets. As a byproduct, we obtain closed pricing formulas for simple futures derivatives such as European type call options, while providing a good fit to futures market data.
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Papers by Lutz von Grafenstein