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Models for spread option pricing in energy markets
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Orientador(es)
Resumo(s)
The European energy landscape is undergoing a significant transformation, driven by the
increasing importance of electrical interconnections.
Interconnectors, which are high-voltage cables linking neighboring electricity systems,
facilitate efficient power exchange across regions, balancing supply and demand while
leveraging renewable resources. They help harmonize energy prices, promoting economic
welfare, but technical constraints can lead to congestion and price disparities, resulting in
inefficiencies.
To manage price fluctuations arising from these challenges, financial derivatives, particularly spread options, are employed. This work discusses two models for pricing spread
options based on the interconnected electricity markets of Spain and France. The first
model utilizes Margrabe’s formula, while the second is designed to model the spread between power spot prices through mean-reverting processes. Subsequently, option prices
are computed based on the prices generated from this spread model. A new approach
refines this second model by incorporating the price difference between power futures as
an input.
Additionally, a trading strategy based on this new approach is developed, aiming to capitalize on auction pricing inefficiencies.
The findings indicate that, despite the inherent risks involved in trading transmission
rights due to the volatility and uncertainty in the electricity market, the model’s results
still provide valuable insights that assist traders in making informed bidding decisions
during auctions for these rights.
Descrição
Palavras-chave
Interconnectors Congestion Volatility Spread Options Jumps Transmission Rights
Contexto Educativo
Citação
Tomé, Filipe Feliciano Dinis (2024). “Models for spread option pricing in energy markets”. Dissertação de Mestrado. Universidade de Lisboa. Instituto Superior de Economia e Gestão
Editora
Instituto Superior de Economia e Gestão