The Swiss electricity market has been facing structural changes in recent years due to market deregulation activities. This development has been accompanied by the emergence of spot markets where electricity is traded between producer and purchaser. Since the price charged to the end-customer turns out to be more exposed to market prices of electricity, the need for
derivatives with a risk management purpose arises. A more recent asset class such as structured products may be used as a risk management tool. This paper focuses on the pricing of various structured products with the Swiss energy price indices as an underlying.
Since electricity has particular features that result in a peculiar stochastic process, the pricing of electricity derivatives cannot rely on traditional pricing formulas that have been developed for equity or commodity underlyings. Rather, there is a need for a dynamic model that captures the unique characteristics of electricity. In this paper, a new jump diffusion process is
proposed and estimated that is able to incorporate the Swiss electricity price properties.
Building on this model, a Monte Carlo simulation is applied that allows one to price differing electricity derivatives that are embedded in structured products. Using the option pricing results, the feasibility and attractiveness of a defined range of structured products is investigated. In order to include the special properties of electricity, new structured products
are developed that are more appropriate as risk management tools. One of the main contributions of this paper is the practical approach of how to price structured products.
Keywords: Electricity, SWEP, Swissix, Structured Products, Monte Carlo, Jump
Diffusion, Derivatives pricing
Inhaltsverzeichnis (Table of Contents)
- 1. Introduction
- 2. Electricity Market
- 2.1 Electricity in the Context
- 2.2 The Power Markets
- 2.3 The Power Exchanges
- 2.4 The Swiss Market
- 2.5 Electricity as an Investment
- 3. Characteristics of Electricity Prices and Returns
- 3.1 Overview
- 3.2 Correlation and Moment Analysis
- 3.3 Main Properties of Electricity Prices
- 4. Estimation of the Stochastic Model
- 4.1 One-Factor Models
- 4.2 A Model with Additional Factors
- 4.3 Data Set
- 4.4 Parameter Estimation Procedure
- 4.5 General Calibration Theory
- 4.6 Disjunction of Jumps and Mean Reverting Process
- 4.7 Parameter Estimation
- 4.7.1 Jump Estimation
- 4.7.2 Mean Reversion
- 4.8 Recapitulation
- 5. Structured Products
- 5.1 Introduction
- 5.2 The Swiss Product Range
- 5.3 Overview of the Literature
- 5.4 In Practice: How Are the Structured Products Priced?
- 5.4.1 Reverse Convertible
- 5.4.2 Capital Protected Note
- 5.4.3 Certificate
- 5.5 Structured Products on Electricity
- 5.5.1 Challenges in the Case of Energy
- 5.5.2 Traditional Structured Products
- 5.5.3 Exotic Structured Products
- 6. Pricing Mechanism and Results
- 6.1 Electricity Option Pricing
- 6.1.1 Two Ways to Meet the Challenge
- 6.1.2 A Simplified Approach
- 6.1.3 Monte Carlo Method
- 6.2 Procedure
- 6.2.1 Discretization
- 6.2.2 Drawbacks
- 6.2.3 Simulation Results
- 6.2.4 Option Pricing Results
- 6.3 Structured Product Pricing
- 6.4 Feasibility of Structured Products on Electricity
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This master's thesis investigates the pricing of structured products based on Swiss electricity price indices. The main objective is to develop a dynamic model capable of capturing the unique characteristics of electricity prices and to use this model for pricing various electricity derivatives embedded within structured products. The feasibility and attractiveness of different structured products as risk management tools are also assessed. * Modeling electricity price dynamics using a jump diffusion process. * Pricing electricity derivatives using Monte Carlo simulation. * Developing new structured products suitable for risk management in the electricity market. * Assessing the feasibility and attractiveness of structured products on electricity. * Analyzing the Swiss electricity market and its structural changes.Zusammenfassung der Kapitel (Chapter Summaries)
Chapter 1 introduces the topic of structured products on electricity within the context of the deregulated Swiss electricity market. Chapters 2 and 3 analyze the characteristics of electricity prices and returns, highlighting their unique stochastic properties. Chapter 4 details the estimation of a stochastic model, proposing and calibrating a jump diffusion process to capture these properties. Chapter 5 provides an overview of structured products, focusing on those available in the Swiss market and their traditional pricing mechanisms. Chapter 6 describes the pricing methodology used for electricity options, including a Monte Carlo simulation, and explores the practicality of applying these models to various structured product types.Schlüsselwörter (Keywords)
Electricity, Swiss electricity market, structured products, derivatives pricing, Monte Carlo simulation, jump diffusion, risk management, energy price indices, option pricing.- Citar trabajo
- MSc. Financial Engineering Florian Giger (Autor), 2008, Structured Products on Electricity, Múnich, GRIN Verlag, https://www.grin.com/document/119214