spanish power option pricing hi paul / cassim ,
further to our meeting yesterday regarding power options , that we may use to
capture short - term volatility from regulatory caps being adhered to or
broken , i have attached a spreadsheet that should assist in nailing down the
value .
arbitrary distribution
the first issue to address is converting the price scenarios for the average
of the q 2 - q 3 swap into a volatility equivalent . this is achieved by fitting
a normal distribution that matches the one specified for mean and standard
deviation . the graph below illustrates the method for the numbers discussed
yesterday . in this example , the annualised volatility is coming up as
approximately 23 % .
pricing & implied volatility
the pricing is as for a regular asian option . the payoff depends on the
average of the daily prices for spanish power for q 2 and q 3 . the valuation
using 23 % volatility is showing about 15 . 3 pta per kwh .
i will schedule a meeting to allow us to take this forward .
regards ,
anjam
x 35383
spreadsheet :