Abstract
By analysing spot price characteristics at compliance time from equilibrium perspective, the CO price dynamical models are obtained for both bankable and nonbankable regulations with the prices of spots and futures being non-log-normal, and the futures option pricing model is established. Then, a fitted finite volume method (FVM) is proposed to solve the pricing model. Also, its monotonicity, stability, and convergence are studied. Furthermore, the convergence rates are compared between our fitted FVM and the finite difference method. Moreover, the Δ-hedge experiments are performed, in which the hedge cost and the hedge error are estimated. Finally, using the Monte Carlo's pricing results as a benchmark, we compare the computational results from the fitted FVM and the Black formula approximation, respectively, which shows that the former is fitted for the Monte Carlo better than the latter, especially for the futures options with the bigger volatility or the maturity near the compliance time.
Sign-in/Register to access full text options 
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 callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
