Description of Colombian Electricity Pricing Derivatives

Sellamuthu Prabakaran

doi:10.47747/ijfr.v2i3.394

Abstract

Electricity markets are becoming a popular field of research amongst academics because of the lack of appropriate models for describing electricity price behavior and pricing derivatives instruments. Models for price dynamics must consider seasonality and spiky behavior of jumps which seem hard to model by standard jump process. Without good models for electricity price dynamics, it is difficult to think about good models for futures, forward, swaps and option pricing. In this paper we attempt to introduce an algorithm for pricing derivatives to intuition from Colombian electricity market. The main ambition of this study is fourfold: 1) First we begin our approach through to simple stochastic models for electricity pricing. 2) Next, we derive analytical formulas for prices of electricity derivatives with different derivatives tools. 3) Then we extent short of the model for price risk in the electricity spot market 4) Finally we construct the model estimation under the physical measures for Colombian electricity market. And this paper end with conclusion.

Highlights

Deregulation of electricity markets has led to a considerable increase in risk accepted by market participants
3) we extent short of the model for price risk in the electricity spot market 4) we construct the model estimation under the physical measures for Colombian electricity market
The models for the spot market engagement at least two risk factors: first one, seizing the short-term hourly price dynamics characterized by mean reversion and tremendously high volatility, and the other factor demonstrating long-term price behavior observed in the futures market

Summary

Introduction

Deregulation of electricity markets has led to a considerable increase in risk accepted by market participants. A forthright way to do it is to use derivatives, like forwards and options We use the latter approach and describe the spot price dynamic models to review the electricity pricing with details of how to implement the pricing of electricity market a After specifying a model we must choose for derivatives pricing methodology. Previous work has been focused mainly on either of the two following approaches: Market models for futures prices: As an alternative of modeling the spot price and deriving futures prices, the futures prices themselves are demonstrated This method goes back to Black's model (1976), where a single futures contract is measured. The models for the spot market engagement at least two risk factors: first one, seizing the short-term hourly price dynamics characterized by mean reversion and tremendously high volatility, and the other factor demonstrating long-term price behavior observed in the futures market. Vol 2, No., September 2021 conditional opportunities under the equivalent martingale measure

T2 -T1

Electricity Derivatives Pricing

MODEL FOR PRICE RISK

MODEL ESTIMATION UNDER THE PHYSICAL MEASURE

Findings

Conclusion