Pricing of exotic energy derivatives

Abstract

This paper discusses the pricing of exotic energy based derivatives, more particularly in the field of electricity. It follows a two-step approach wherein first the underlier, which is the electricity spot price, is modeled first and then these prices are used to model the derivatives based on their payoffs. It discusses the different models present in literature which can be used to model prices and their corresponding returns. It also explores better ways of modeling both the underlier and the derivatives.