NDLI: Pricing and hedging Asian-style options on energy

Content Provider	Springer Nature Link
Author	Benth, Fred Espen Detering, Nils
Copyright Year	2015
Abstract	We solve the problem of pricing and hedging Asian-style options on energy with a quadratic risk criterion when trading in the underlying future is restricted. Liquid trading in the future is only possible up to the start of a so-called delivery period. After the start of the delivery period, the hedge positions cannot be adjusted any more until maturity. This reflects the trading situation at the Nordic energy market Nord Pool, for example. We show that there exists a unique solution to this combined continuous–discrete quadratic hedging problem if the future price process is a special semimartingale with bounded mean–variance tradeoff. Additionally, under the assumption that the future price process is a local martingale, the hedge positions before the averaging period are inherited from the market specification without trading restriction. As an application, we consider three models and derive their quadratic hedge positions in explicit form: a simple Black–Scholes model with time-dependent volatility, the stochastic volatility model of Barndorff-Nielsen and Shephard, and an exponential additive model. Based on an exponential spot price model driven by two NIG Lévy processes, we determine an exponential additive model for the future price by moment matching techniques. We calculate hedge positions and determine the quadratic hedging error in a simulation study.
Ending Page	889
Page Count	41
Starting Page	849
File Format	PDF
ISSN	09492984
e-ISSN	14321122
Journal	Finance and Stochastics
Issue Number	4
Volume Number	19
Language	English
Publisher	Springer Berlin Heidelberg
Publisher Date	2015-08-18
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Quadratic hedging Asian options Trading restrictions Statistics for Business/Economics/Mathematical Finance/Insurance Finance Economic Theory/Quantitative Economics/Mathematical Methods Probability Theory and Stochastic Processes Moment matching Energy markets Quantitative Finance Derivative securities
Content Type	Text
Resource Type	Article
Subject	Finance Statistics and Probability Statistics, Probability and Uncertainty

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