{"title":"Pricing Energy Derivatives by Linear Programming: Tolling Agreement Contracts","authors":"Valeriy Ryabchenko, S. Uryasev","doi":"10.21314/JCF.2011.236","DOIUrl":null,"url":null,"abstract":"We introduce a new approach for pricing energy derivatives known as tolling agreement contracts. The pricing problem is reduced to a linear program. We prove that the optimal operating strategy for a power plant can be expressed through optimal exercise boundaries (similar to the exercise boundaries for American options). We find the boundaries as a byproduct of the pricing algorithm. The suggested approach can incorporate various real world power plant operational constraints. We demonstrate computational efficiency of the algorithm by pricing 1and 10-year tolling agreement contracts.","PeriodicalId":51731,"journal":{"name":"Journal of Computational Finance","volume":"14 1","pages":"73-126"},"PeriodicalIF":0.8000,"publicationDate":"2011-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"8","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Computational Finance","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.21314/JCF.2011.236","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 8
Abstract
We introduce a new approach for pricing energy derivatives known as tolling agreement contracts. The pricing problem is reduced to a linear program. We prove that the optimal operating strategy for a power plant can be expressed through optimal exercise boundaries (similar to the exercise boundaries for American options). We find the boundaries as a byproduct of the pricing algorithm. The suggested approach can incorporate various real world power plant operational constraints. We demonstrate computational efficiency of the algorithm by pricing 1and 10-year tolling agreement contracts.
期刊介绍：
The Journal of Computational Finance is an international peer-reviewed journal dedicated to advancing knowledge in the area of financial mathematics. The journal is focused on the measurement, management and analysis of financial risk, and provides detailed insight into numerical and computational techniques in the pricing, hedging and risk management of financial instruments. The journal welcomes papers dealing with innovative computational techniques in the following areas: Numerical solutions of pricing equations: finite differences, finite elements, and spectral techniques in one and multiple dimensions. Simulation approaches in pricing and risk management: advances in Monte Carlo and quasi-Monte Carlo methodologies; new strategies for market factors simulation. Optimization techniques in hedging and risk management. Fundamental numerical analysis relevant to finance: effect of boundary treatments on accuracy; new discretization of time-series analysis. Developments in free-boundary problems in finance: alternative ways and numerical implications in American option pricing.
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