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Pricing Flow Commodity Derivatives Using Fixed Income Market Techniques

Author

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  • JURI HINZ

    (Institute for Operations Research and RiskLab, ETH Zentrum, CH-8092 Zurich, Switzerland)

  • MARTINA WILHELM

    (Institute for Operations Research, ETH Zentrum, CH-8092 Zurich, Switzerland)

Abstract

In this work, the valuation of energy-related financial contracts written on prices of flow commodities (such as natural gas, oil and electrical power) will be elaborated. Due to restrictions on storability of the underlying, the pricing of flow commodity derivatives is not trivial and thus correct valuation is still under discussion. In this paper, an axiomatic setting is followed, which provides a connection to interest rate theory, whose toolkit we utilize to consistently price frequently quoted flow commodity options such as caps, floors, collars and cross commodity spreads.

Suggested Citation

  • Juri Hinz & Martina Wilhelm, 2006. "Pricing Flow Commodity Derivatives Using Fixed Income Market Techniques," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(08), pages 1299-1321.
    • Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:08:n:s0219024906004001
    DOI: 10.1142/S0219024906004001
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/607 is not listed on IDEAS
    2. Helyette Geman, 2005. "Commodities and Commodity Derivatives. Modeling and Pricing for Agriculturals, Metals and Energy," Post-Print halshs-00144182, HAL.
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    Cited by:

    1. Fanelli, Viviana & Maddalena, Lucia & Musti, Silvana, 2016. "Modelling electricity futures prices using seasonal path-dependent volatility," Applied Energy, Elsevier, vol. 173(C), pages 92-102.
    2. Ingo Beyna, 2013. "Interest Rate Derivatives," Lecture Notes in Economics and Mathematical Systems, Springer, edition 127, number 978-3-642-34925-6, October.
    3. Doege, Jörg & Fehr, Max & Hinz, Juri & Lüthi, Hans-Jakob & Wilhelm, Martina, 2009. "Risk management in power markets: The Hedging value of production flexibility," European Journal of Operational Research, Elsevier, vol. 199(3), pages 936-943, December.

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