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Pricing electric power options by maximizing the utility of investment wealth with fuzzy measures

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Abstract

Electric power options are hardly priced for the non-storable nature of electric energy. A pricing model for European call options on electric power is proposed, which is expected to give option premiums to investors by using optimization, expected utility as well as fuzzy measure theories. Firstly, a formula of the option premium based on maximizing the utility of investment wealth is given, where the utility function represents the investor’s preference for wealth and the Choquet expected integral with the λ-additive fuzzy measure is used to express the difference between investors in the estimation of option value. Then, combined with practical constraints a pricing model for the electric power option is obtained by maximizing the utility of investment wealth with the fuzzy measures. The integration of fuzzy measure and probability measure depicts the uncertainty of the option value, making the produced option premium worthwhile to refer to. Lastly, the impacts of utility functions, fuzzy parameters and practical constraints are tested by examples.

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Acknowledgments

This paper is supported by the Fundamental Research Funds for the Central Universities (12MS84), the Co-construction Project of Beijing Municipal commission of Education, the National Natural Science Foundation of China (Grant No. 71171080).

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Authors and Affiliations

  1. School of Mathematics and Physics, North China Electric Power University, Beijing, 102206, People’s Republic of China

    Yundong Gu, Yajing An, Degang Chen & Sujie Zhang

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  1. Yundong Gu
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  2. Yajing An
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  3. Degang Chen
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  4. Sujie Zhang
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Correspondence to Yundong Gu.

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Gu, Y., An, Y., Chen, D. et al. Pricing electric power options by maximizing the utility of investment wealth with fuzzy measures. Int. J. Mach. Learn. & Cyber. 6, 409–415 (2015). https://doi.org/10.1007/s13042-014-0270-0

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  • DOI: https://doi.org/10.1007/s13042-014-0270-0

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