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
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
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