A life-cycle view of electricity futures contracts

Abstract

The purpose of this paper is to provide a unique perspective on the new electricity futures contracts in an effort to understand the future development of this particular market. In this paper, we provide a brief overview of the electricity futures market and focus on how to understand general arbitrage trading in the electricity futures market. After illustrating basis cost of carry and reverse cost of carry approaches to arbitrage, we compare the electricity futures pricing behavior with Eurodollar futures, copper, and gold. We find evidence that the electricity futures market is still trading as a virtually unarbitraged market. We expect this will change soon.