Abstract
The principle of replication or superhedging is widely used for valuating financial contracts, in particular, derivatives. In the special situation of energy markets, this principle is not quite appropriate and might lead to unrealistic high prices, when complete hedging is not possible, or to unrealistic low prices, when own production is involved. Therefore we compare it to further valuation strategies: acceptability pricing weakens the requirement of almost sure replication and indifference pricing accounts for the opportunity costs of producing for a considered contract. Finally, we describe a game-theoretic approach for valuating flexible contracts (swing options), which is based on bi-level optimization.
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Notes
- 1.
Negative liabilities are profits.
- 2.
We denote by x ⋅ S the inner product of the vectors x and S.
- 3.
The ask-bid interval has to be clearly distinguished to the bid-ask spread (bid-price \(<\) ask-price) appearing in stock exchanges, when no deal can be made.
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Kovacevic, R.M., Pflug, G.C. (2013). Pricing of Energy Contracts: From Replication Pricing to Swing Options. In: Kovacevic, R., Pflug, G., Vespucci, M. (eds) Handbook of Risk Management in Energy Production and Trading. International Series in Operations Research & Management Science, vol 199. Springer, Boston, MA. https://doi.org/10.1007/978-1-4614-9035-7_15
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DOI: https://doi.org/10.1007/978-1-4614-9035-7_15
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