Pricing of Electricity Swing Options

Posted: 5 Feb 2004

See all articles by Jussi Keppo

Jussi Keppo

National University of Singapore - NUS Business School

Abstract

We consider the pricing of electricity swing options that hedge the electricity price risk and also partly hedge the risks in the option owner's electricity consumption process. The swing derivative sets instantaneous and cumulative boundaries for the electricity consumption and it specifies the price at which the option owner can buy energy. The name swing option comes from these consumption boundaries since the consumption swings between the lower and upper boundaries. We show that the swing options can be priced and hedged with regular electricity forwards and call options. Then we illustrate in a numerical example how swing options can be used to model and hedge power plants.

Keywords: Derivative pricing, electricity market, consumption uncertainty

Suggested Citation

Keppo, Jussi, Pricing of Electricity Swing Options. Journal of Derivatives, Vol. 11, pp. 26-43, 2004. Available at SSRN: https://ssrn.com/abstract=494522

Jussi Keppo (Contact Author)

National University of Singapore - NUS Business School ( email )

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