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The Valuation of Clean Spread Options: Linking Electricity, Emissions and Fuels

Carmonaa, René; Coulonb, Michael; Schwarz, Daniel

Quantitative Finance, 12(12) (2012), 1951-1965

The purpose of the paper is to present a new pricing method for clean spread options, and to illustrate its main features on a set of numerical examples produced by a dedicated computer code. The novelty of the approach is embedded in the use of a structural model as opposed to reduced-form models which fail to capture properly the fundamental dependencies between the economic factors entering the production process.