Title: Pricing and hedging wholesale energy structured products: a comparison of numerical methods for VPP

Authors: Enzo Fanone

Addresses: University of Trieste and Edison Trading Spa, Foro Buonaparte 31, 20121 Milan, Italy

Abstract: The paper deals with the interesting topic of pricing energy structurated products which are traded in OTC market. The paper concentrates on a specific virtual asset, namely virtual power plant (VPP). The paper contains the definition of VPP, a description of the mathematical approach used in the literature to evaluate VPP, an illustration of the competing dynamic programming (DP) methods used to evaluate VPP and an application, whose aim is to compare the empirical performance of those evaluation methods. An extension of the VPP, namely downswing VPP is also presented and evaluated using the DP methods introduced in the context of the standard VPP.

Keywords: real options; unit commitment; multi-stage stochastic modelling; energy derivatives; pricing; hedging; virtual assets; virtual power plants; dynamic programming; wholesale energy structured products.

DOI: 10.1504/IJFMD.2010.032468

International Journal of Financial Markets and Derivatives, 2010 Vol.1 No.2, pp.175 - 195

Published online: 03 Apr 2010 *

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