This paper presents valuation models of emission allowance options under an emission trading scheme, operating in an open trading phase, where unused allowances are banked to subsequent phases without any limit. Empirical studies are carried out to show that allowance option prices exhibit...

In this paper, we consider the problem of optimal partial hedging for a contingent claim subject to a preset hedging budget constraint. Under some technical assumptions on the hedged loss function and the market pricing functional, the optimal partial hedging strategy, which minimizes the...

This paper provides a complete-market valuation framework for emission allowances and related derivatives. In particular we present a structural model by assuming an emission rate with time-homogeneous parameters, where closed-form expressions are derived for allowances, allowance futures, and...

Hedging is one of the most important topics in finance. When a financial market is complete, every contingent claim can be hedged perfectly to eliminate any potential future obligations. When the financial market is incomplete, the investor may eliminate his risk exposure by superhedging. In...