Author(s)

Mingzhu Wu

Corresponding Author

Mingzhu Wu

Abstract

Since the electric power cannot be stored for long time, the spot prices of electricity are extremely volatile. In order to control risks, it is necessary to introduce financial derivatives into electricity markets. This paper mainly studies the pricing of electricity swing options, which are widely applied in financial markets for electricity. Through finite difference and discretization of transaction time and price, the issue of swing option pricing is transformed to a linear complementary problem. At the same time, the optimization model is established by combining optimal behaviors of swing option buyers. Finally, through the actual data of electricity futures, above model and algorithm are used to simulate the pricing of swing options.

Keywords

Swing options, electricity market, complementary model, M-matrix.