Abstract/Details

A mathematical model for power derivatives


2007 2007

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Abstract (summary)

Ever since the deregulation of the power market, lots of different complicated derivatives started to emerge in the market as risk management tool. For example, monthly option and daily option, etc. Because electricity has some unique features such as non-storability and requires instantaneous and constant balance between supply and demand, it is quite different from most products in financial markets or other commodity markets. These unique features make it difficult to construct a model to reconcile all kinds of derivatives consistently.

We investigate these unique features of electricity and suggest to treat different daily forwards as different products instead of a time series. We construct multivariate geometrical Brownian motions with certain correlation for these synthetic daily forwards. Then we examine the observable monthly forward process and find that another constructed log-normal process is very close to it under this construction of daily forward processes. Then we use this constructed process to derive the close formula to price monthly options. Finally we borrow the calendar spread idea from financial market and show that the monthly option could be hedged by daily option relatively well. This new mathematical model reconciles different observable products in the market pretty well, provides rather simple closed-form formulas to price monthly/daily options, and furnishes with easily calculated hedging strategy.

Indexing (details)


Subject
Mathematics
Classification
0405: Mathematics
Identifier / keyword
Pure sciences; Daily options; Electricity; Monthly options; Power derivatives
Title
A mathematical model for power derivatives
Author
She, Chunfeng
Number of pages
67
Publication year
2007
Degree date
2007
School code
0093
Source
DAI-B 69/02, Dissertation Abstracts International
Place of publication
Ann Arbor
Country of publication
United States
ISBN
9780549442707
Advisor
Goodman, Victor W.
Committee member
Chang, Fwu-Ranq; Glassey, Robert; Sternberg, Peter
University/institution
Indiana University
Department
Mathematics
University location
United States -- Indiana
Degree
Ph.D.
Source type
Dissertations & Theses
Language
English
Document type
Dissertation/Thesis
Dissertation/thesis number
3297110
ProQuest document ID
304849417
Copyright
Database copyright ProQuest LLC; ProQuest does not claim copyright in the individual underlying works.
Document URL
http://search.proquest.com/docview/304849417
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