Abstract
In this paper, we present an analytical solution for Digital Average Price Options (DAPO). This is an extension of digital options to incorporate average price or Asian price characteristics. We build on work by Zhang (1998), Turnbull and Wakeman (1991), and Haug (2004). We utilize numerical difference methods to calculate the Greeks based on the derived closed-form solution. These options can be used to manage risk or generate income. These products can effectively manager tail risk exposures with one transaction for an energy company who is exposed to multiple types of tail risk, which otherwise would require insuring each event with separate transactions at additional costs. We present an example of an Electricity Utility managing swing risk of serving demand (load) during peak winter months.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
