ES: Price of an Energy Swap/Forward

In Lcolzani98/OptionPricingFunctions: Option Pricing Functions

Price of an Energy Swap/Forward

Description

The function computes the price of both Energy Swaps and Forwards

Usage

ES(f, u, n, r_ji, t_b, r_b)  

Arguments

f	forward/swap price
u	number of compounding per year
n	number of settlements in the delivery period for the forward contract
r_ji	risk - free interest swap rate starting at the beginning of the delivery
t_b	time to the beginning of the forward delivery period
r_b	risk free continuously compounded zero coupon rate with Tb years to

Details

Oil and electricity swaps are actively traded in the energy markets. Given the presence of traded contracts with quoted market prices for instance, a swap (forward) we can come up with a way to value the swap relative to other swaps

Value

Price of an Energy Swap/Forward given the forward/swap price f, the number of compounding per year u, the number of settlements in the delivery period for the forward contract n,the risk - free interest swap rate starting at the beginning of the delivery r_ji,the time to the beginning of the forward delivery period t_b, the risk free continuously compounded zero coupon rate with Tb years to r_b

Author(s)

Colzani Luca, Magni Marta, Mancassola Gaia, Kakkanattu Jenson

References

Espen Gaarder Haug(2007):The Complete Guide to Option Pricing Formulas

Examples

 ES(35,365,90,0.05,0.5,0.04)
## The function is currently defined as
function (f, u, n, r_ji, t_b, r_b) 
{
    ratio <- (exp(-r_b * t_b)/n)
    price <- 0
    for (k in 1:n) {
        price <- price + (f/(1 + (r_ji/u))^(k))
    }
    price <- price * ratio
    return(round(price, 2))
  }

Lcolzani98/OptionPricingFunctions documentation built on June 13, 2022, 5:46 a.m.