Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Finance

No 2004-10: Energy Options in an HJM Framework

Thomas Lyse Hansen and Bjarne Astrup Jensen
Additional contact information
Thomas Lyse Hansen: Dong A/S
Bjarne Astrup Jensen: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark

Abstract: It is a delicate matter to trade spot products and financial derivatives in energy markets. Op-posite to bond and stock markets, the underlying assets are real products and a significant part of the demand for them represents a real need for the products, which can only be substituted away with some difficulties or, in some cases, only in a prohibitively costly manner. This is particularly true in the spot market, where the demand is almost always met, but where the spot price processes can be quite different from the spot price processes conventionally used in the pricing of derivatives. This pattern of real demand is also the main reason for the existence of the well-known convenience yield in energy markets.

Keywords: HJM; Framework; Energy options

JEL-codes: G00

38 pages, January 5, 2005

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