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Kemper, Annika
Schmeck, Maren Diane
Balci, Anna KH.
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Center for Mathematical Economics Working Papers No. 635
In electricity markets, futures contracts typically function as a swap since they deliver the underlying over a period of time. In this paper, we introduce a market price for the delivery periods of electricity swaps, thereby opening an arbitrage-free pricing framework for derivatives based on these contracts. Furthermore, we use a weighted geometric averaging of an artificial geometric futures price over the corresponding delivery period. Without any need for approximations, this averaging results in geometric swap price dynamics. Our framework allows for including typical features as the Samuelson effect, seasonalities, and stochastic volatility. In particular, we investigate the pricing procedures for electricity swaps and options in line with Arismendi et al. (2016), Schneider and Tavin (2018), and Fanelli and Schmeck (2019). A numerical study highlights the differences between these models depending on the delivery period.
Electricity Swaps
Delivery Period
Market Price of Delivery Risk
Samuelson Effect
Stochastic Volatility
Option Pricing
Heston Model
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Working Paper

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