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Derivatives pricing in energy markets: an infinite dimensional approach

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  • Fred Espen Benth
  • Paul Kruhner

Abstract

Based on forward curves modelled as Hilbert-space valued processes, we analyse the pricing of various options relevant in energy markets. In particular, we connect empirical evidence about energy forward prices known from the literature to propose stochastic models. Forward prices can be represented as linear functions on a Hilbert space, and options can thus be viewed as derivatives on the whole curve. The value of these options are computed under various specifications, in addition to their deltas. In a second part, cross-commodity models are investigated, leading to a study of square integrable random variables with values in a "two-dimensional" Hilbert space. We analyse the covariance operator and representations of such variables, as well as presenting applications to pricing of spread and energy quanto options.

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  • Fred Espen Benth & Paul Kruhner, 2014. "Derivatives pricing in energy markets: an infinite dimensional approach," Papers 1412.7943, arXiv.org.
    • Handle: RePEc:arx:papers:1412.7943
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    7. Unknown, 2005. "Forward," 2005 Conference: Slovenia in the EU - Challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183804, Slovenian Association of Agricultural Economists (DAES).
    8. Fred Espen Benth & Paul Kruhner, 2014. "Representation of infinite dimensional forward price models in commodity markets," Papers 1403.4111, arXiv.org.
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