17 Maggio, 2016 17:15 in punto

Sezione di Finanza Quantitativa

Pricing a Swap on the Italian Spark Spread in the Presence of Counterparty Credit Risk

Viviana Fanelli, Department of Economics, Management and Business Law, Università degli Studi di Bari

Aula Seminari - III Piano

The liberalization of energy markets led to the development of new risk management strategies, as well as to the increase of energy trading opportunities for market players. For years researchers and practition-ers have been interested in analyzing relationships among commodity prices, and studying specic price spreads by observing their behaviour. We investigate the relationship existing between the electricity forward price and the natural gas forward price in Italy, and we propose an appropriate pricing model for the spread between the two prices. In energy markets, this spread is referred to as spark spread. The spark spread mimics nancially the generation costs of electricity for a spe-cic facility because it involves the simultaneous purchase of natural gas and sale of electricity. Furthermore, we aim at evaluating nancial derivatives that oer the ability to lock in a price margin on current and future electricity generation to utilities, generators, and market actors. In particular, we focus on studying the cash ow structure of a spark spread swap and we use a reduced form modelling approach to assess the impact of counterparty risk on pricing formulas.