Pricing Electricity Futures Options under Enlarged Filtrations

Abstract

We derive risk-neutral option price formulas for plain-vanilla and exotic electricity futures derivatives on the basis of diverse arithmetic multi-factor Ornstein-Uhlenbeck spot price models admitting seasonality. In these setups, we take additional forward-looking knowledge on future price behavior into account via multiple initially enlargements of the underlying information filtration. In this insider trading context, we also correlate electricity prices with outdoor temperature and treat a related pricing problem under supplementary temperature forecasts. Meanwhile, we use Fourier transform techniques and results from complex analysis to handle the emerging anticipating conditional expectations. As a by-product we derive related risk and information premia. The paper can be regarded as an extension of [4] and [5], since in [4] no future information is involved while in [5] no option pricing is considered.

Keywords: Electricity futures, option pricing, mean-reverting multi-factor model, Itô-Lévy process, enlargement of filtration, forward-looking information, insider trading, information premium, Fourier transform

JEL Classification: C00, C53, D43, D52, D81, D82, G13, G14