A framework for valuing electricity options and measuring electricity price risk

Tanner, Mark Harrington. (1999). A framework for valuing electricity options and measuring electricity price risk Honours Thesis, Dept. of Commerce, University of Queensland.

       
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Author Tanner, Mark Harrington.
Thesis Title A framework for valuing electricity options and measuring electricity price risk
School, Centre or Institute Dept. of Commerce
Institution University of Queensland
Publication date 1999
Thesis type Honours Thesis
Total pages 97
Language eng
Subjects 15 Commerce, Management, Tourism and Services
Formatted abstract The spot price of electricity is extremely volatile. Electricity generators and retailers use a number of derivatives to reduce this price risk. This thesis establishes a numerical method for the pricing of electricity derivatives. It also details a method for measuring the effectiveness of these derivatives in reducing the generators' and retailers' price risk. The accuracy of both methods relies on the assumption that the model of electricity prices is correctly specified. The results of this thesis suggest that applying Merton's (1976a) option pricing formula to electricity options produces biased results. This thesis establishes that a Conditional Pareto model will produce simulated price series that conform to the observed price series, while the Jump Diffusion model, which has been prominent in the literature to date, does not accurately model electricity prices. These results have important practical implications for the risk management activities of electricity generators and retailers.

 
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Created: Wed, 27 Oct 2010, 12:36:33 EST by Muhammad Noman Ali on behalf of The University of Queensland Library