Risk‐Neutral Models for Emission Allowance Prices and Option Valuation

Risk‐Neutral Models for Emission Allowance Prices and Option Valuation

0.00 Avg rating0 Votes
Article ID: iaor20118298
Volume: 57
Issue: 8
Start Page Number: 1453
End Page Number: 1468
Publication Date: Aug 2011
Journal: Management Science
Authors: ,
Keywords: Emission trading, options
Abstract:

The existence of mandatory emission trading schemes in Europe and the United States, and the increased liquidity of trading on futures contracts on CO2 emissions allowances, led naturally to the next step in the development of these markets: These futures contracts are now used as underliers for a vibrant derivative market. In this paper, we give a rigorous analysis of a simple risk‐neutral reduced‐form model for allowance futures prices, demonstrate its calibration to historical data, and show how to price European call options written on these contracts.

Reviews

Required fields are marked *. Your email address will not be published.