Thursday, May 17, 2012 - 11:00am - 11:45am
Michael Coulon (Princeton University)
Spread option pricing is of utmost importance in all energy markets, and in electricity in particular due to its application to power plant valuation and risk management. However, many practitioners still rely on either complicated, intractable production cost models or convenient but overly simplified approaches like Margrabe’s formula. In addition to the highly non-Gaussian nature of log power prices, such reduced-form models fail to capture the crucial state-dependent correlation structure between electricity, fuel (coal, natural gas, etc.) and emissions prices.
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