This paper analyzes the valuation of day-ahead Physical Transmission Rights (PTRs) on the German-Dutch interconnector. From a financial perspective, PTRs are options written on the difference between the German and Dutch hourly electricity prices. We propose a model for the valuation of...

This paper analyzes the valuation of monthly Physical Transmission Rights (PTRs) on the German-Dutch interconnector. From a financial perspective, PTRs are exchange options written on the German and Dutch day-ahead electricity price. We extend the famous exchange option model by Margrabe (1978)...

We examine investments in power generation projects under policy uncertainty, when the investor has the choice between two alternative technologies, a gas-fired plant and a wind plant. Increased risk of subsidy withdrawal reduces the payoff from and postpones investments in the wind technology....

Much of the responsibility for upheaval in international financial markets has been placed on speculators, particularly hedge funds. Speculative capital has been characterized as quot;hot money,quot; with capital flows driven by quot;herding,quot; quot;flocking,quot; and quot;contagionquot;...

We analyze transition probabilities of regime-switching in electricity prices based on supply and demand by using the structural model of Kanamura and Ohashi (2004). We show that the transition probabilities depend on the demand level and thus are not constant. This result is in sharp contrast...

We develop a general method for estimating the implied, martingale equivalent, probability density function (PDF) for futures prices from American options prices. The early exercise feature of American options precludes expressing the price of the option in terms of the PDF. There exist tight...

The article reviews six different temperature forecasting models propsoed by the prior literature for pricing weather derivatives. Simulation of these models is used to estimate daily temperature and, as a consequence, the metrics used for pricing temperature derivatives. The models that rely on...

This paper presents implied volatility smiles and skews for plain vanilla electricity options based on a new bid stack model developed in a previous paper. This underlying bid stack model for the electricity market is extended to the case of an arbitrary number N of technology classes embedded...

In this paper, we investigate the pricing of crack spread options. The special focus is laid on the question, of whether univariate modeling of the crack spread or explicit modeling of the two underlyings is preferable. Therefore, we contrast the bivariate GARCH volatility model for...

We review and synthesize the empirical evidence on several factors related to petroleum product prices: (1) the general distributional characteristics of petroleum product prices; (2) the influence of refinery outages, extreme weather, and similar circumstances on product prices; (3) the way...