Pricing of Exotic Energy Derivatives Based on Arithmetic Spot Models

International Journal of Theoretical and Applied Finance, Vol. 12, No. 4, pp. 491-506, 2009

Posted: 2 Dec 2009

See all articles by Fred Espen Benth

Fred Espen Benth

University of Oslo

Rodwell Kufakunesu

University of Pretoria - Mathematics and Applied Mathematics Dept.

Abstract

Based on a non-Gaussian Ornstein–Uhlenbeck model for energy spot, we derive prices for Asian and spread options using Fourier techniques. The option prices are expressed in terms of the Fourier transform of the payoff function and the characteristic functions of the driving noises, being independent increment processes. In many relevant situations, these functions are explicitly available, and fast Fourier transform can be used for efficient numerical valuation. The arithmetic nature of our model implies that only a one-dimensional Fourier transform is required in the computation of the price, contrary to geometric models where transformation along both underlying variables is necessary.

Keywords: Energy markets, spread options, Asian options, fast Fourier transform, non-Gaussian Ornstein–Uhlenbeck processes, independent increment processes

Suggested Citation

Benth, Fred Espen and Kufakunesu, Rodwell, Pricing of Exotic Energy Derivatives Based on Arithmetic Spot Models. International Journal of Theoretical and Applied Finance, Vol. 12, No. 4, pp. 491-506, 2009, Available at SSRN: https://ssrn.com/abstract=1515526

Fred Espen Benth (Contact Author)

University of Oslo ( email )

Center of Mathematics for Applications
Oslo, N-0317
Norway

Rodwell Kufakunesu

University of Pretoria - Mathematics and Applied Mathematics Dept. ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

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