Multi layer model for correlated energy prices

In this booklet we develop an extension of the affine jump-diffusion modeling framework and use it to build an intuitive and tractable model of an energy price complex. The development is motivated by the need to model prices of electricity while capturing their dependence on the price of other energy commodities. Such a model is essential for valuing a range of typical derivatives traded in the electricity markets: cross-commodity spread options, cross-location spread options, fuel-switching powerplants, etc. We give an approximate pricing method for these derivatives together with precise error bound estimates.

Autorentext

Slimane Grine has a physics and systems engineering background which is complemented by a PhD in financial mathematics. He has a long career in the energy trading industry covering commodities such as electricity, gas and coal. Slimane Grine is currently working as a senior spec analyst/trader in Switzerland.

Klappentext

In this booklet we develop an extension of the affine jump diffusion modeling framework and use it to build an intuitive and tractable model of an energy price complex. The development is motivated by the need to model prices of electricity while capturing their dependence on the price of other energy commodities. Such a model is essential for valuing a range of typical derivatives traded in the electricity markets: cross-commodity spread options, cross-location spread options, fuel-switching powerplants, etc. We give an approximate pricing method for these derivatives together with precise error bound estimates.