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Approximate Recursive Valuation of electricity swing options
http://www.erasmusenergy.com/articles/79/1/Approximate-Recursive-Valuation-of-electricity-swing-options/Page1.html
Matt Davison
Assistant Vice President, Equity Arbitrage, Deutsche Bank Canada, 1997-1999
Ph.D., Applied Mathematics, UWO, 1995
M.Sc., Applied Mathematics, UWO, 1993
B.A.Sc., Engineering Science, Univ. of Toronto, 1991  
By Matt Davison
Published on 10/15/2007
 
Keywords: Energy, Finance, Applied Probability, Markov Processes, Electricity markets.
Published in:
Publication year: 2003
Co-author 1: Lindsay Anderson

Pricing options on electrical power is important because of the worldwide trend toward deregulated electricity markets. It is fasci- nating because of the exotic nature of most power derivatives and because of the many unique features of electricity markets. One of these unique features is that electrical power cannot, in appreciable quantities, be stored. While this plays havoc with arbitrage-free pric- ing strategies, non-storability and the near inelasticity of electricity demand over short times make possible the supply-demand modelling of electricity spot prices. We use these insights to create an approx- imate pricing model for electricity spot prices and use this model to approximate the early exercise boundary for simple swing options.
Approximate Recursive Valuation of electricity swing options

Pricing options on electrical power is important because of the worldwide trend toward deregulated electricity markets. It is fasci- nating because of the exotic nature of most power derivatives and because of the many unique features of electricity markets. One of these unique features is that electrical power cannot, in appreciable quantities, be stored. While this plays havoc with arbitrage-free pric- ing strategies, non-storability and the near inelasticity of electricity demand over short times make possible the supply-demand modelling of electricity spot prices. We use these insights to create an approx- imate pricing model for electricity spot prices and use this model to approximate the early exercise boundary for simple swing options.