In this paper we focus on pricing of structured products in energy markets using utility indifference pricing approach . In particular, we compute the buyer 's price of such derivatives for an agent investing in the forward market , whose preferences are described by an exponential utility function. Such a price is characterized in terms of continuous viscosity solutions of suitable non-linear PDEs. This provides an effective way to compute both an optimal exercise strategy for the structured product and a portfolio strategy to partially hedge the financial position. In the complete market case, the financial hedge turns out to be perfect and the PDE reduces to particular cases already treated in the literature. Moreover, in a model with two assets and constant correlation , we obtain a representation of the price as the value function of an auxiliary simpler optimization problem under a risk neutral probability, that can be viewed as a perturbation of the minimal entropy martingale measure. Finally, numerical results are provided.
In this paper we study the pricing and hedging of structured products in energy markets , such as swing and virtual gas storage, using the exponential utility indifference pricing approach in a general incomplete multivariate market model driven by finitely many stochastic factors. The buyer of such contracts is allowed to trade in the forward market in order to hedge the risk of his position. We fully characterize the buyer's utility indifference price of a given product in terms of continuous viscosity solutions of suitable nonlinear PDEs. This gives a way to identify reasonable candidates for the optimal exercise strategy for the structured product as well as for the corresponding hedging strategy. Moreover, in a model with two correlated assets, one traded and one nontraded , we obtain a representation of the price as the value function of an auxiliary simpler optimization problem under a risk neutral probability, that can be viewed as a perturbation of the minimal entropy martingale measure. Finally, numerical results are provided.
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focus on pricing
study the pricing and hedging
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using
, such as swing and virtual gas storage, using the exponential
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. In particular, we compute the buyer 's price of such derivatives for an agent investing
in a general incomplete multivariate market model driven by finitely many stochastic factors. The buyer of such contracts is allowed to trade
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, whose preferences are described by an exponential utility function. Such a price is characterized
in order to hedge the risk of his position. We fully characterize the buyer's utility indifference price of a given product
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non-linear
nonlinear
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provides an effective way to compute both an
gives a way to identify reasonable candidates for the
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and a portfolio strategy to partially hedge the financial position. In the complete market case, the financial hedge turns out to be perfect and the PDE reduces to particular cases already treated in the literature.
as well as for the corresponding hedging strategy.
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assets and constant correlation
correlated assets, one traded and one nontraded