Pricing Electricity Derivatives under Future Information

Abstract

In this article we derive risk-neutral option price formulas for both plain-vanilla and exotic electricity futures derivatives on the basis of diverse arithmetic multi-factor Ornstein-Uhlenbeck spot price models admitting seasonality, while – in order to avoid “information miss-specification” – we take additional forward-looking knowledge on future price behavior into account via tailor-made enlargements of the underlying historical information filtrations. In this insider trading context, we also correlate electricity prices with outdoor temperature and treat a related pricing problem under supplementary temperature forecasts. Meanwhile, we use Fourier transform techniques and results from complex analysis to handle the emerging anticipating conditional expectations. As a by-product we derive related risk and information premia. Finally, we investigate utility-maximizing portfolio selection and optimal consumption rates in electricity futures markets even under forward-looking information.

Keywords: Pricing electricity futures options, mean-reverting multi-factor models, Itô-Lévy process, enlargement of filtration, anticipating calculus, forward-looking information, insider trading, information premium, optimal consumption and portfolio choice in electricity markets, Fourier transform

JEL Classification: C00, C53, D43, D52, D81, D82, G11, G13, G14