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Open AccessArticle

Wind Put Barrier Options Pricing Based on the Nordix Index

1
Departamento de Estudios Contable y Financiero, Escuela de Economía y Finanzas, Universidad Icesi, 760008 Cali, Colombia
2
E.T.S. de Ingeniería Industrial, University of Castilla—La Mancha, 13071 Ciudad Real, Spain
*
Author to whom correspondence should be addressed.
Academic Editor: Wing-Keung Wong
Energies 2021, 14(4), 1177; https://doi.org/10.3390/en14041177
Received: 31 December 2020 / Revised: 30 January 2021 / Accepted: 7 February 2021 / Published: 23 February 2021
(This article belongs to the Special Issue Mathematical and Statistical Models for Energy with Applications)
Wind power generators face risks derived from fluctuations in market prices and variability in power production, generated by their high dependence on wind speed. These risks could be hedged using weather financial instruments. In this research, we design and price an up-and-in European wind put barrier option using Monte Carlo simulation. Under the existence of a structured weather market, wind producers may purchase an up-and-in European wind barrier put option to hedge wind fluctuations, allowing them to recover their investments and maximise their profits. We use a wind speed index as the underlying index of the barrier option, which captures risk from wind power generation and the Autoregressive Fractionally Integrated Moving Average (ARFIMA) to model the wind speed. This methodology is applied in the Colombian context, an electricity market affected by the El Niño phenomenon. We find that when the El Niño phenomenon occurs, there are incentives for wind generators to sell their energy to the system because their costs, including the put option price, are lower than the power prices. This research aims at encouraging policymakers and governments to promote renewable energy sources and a financial market to trade options to reduce uncertainty in the electrical system due to climate phenomena. View Full-Text
Keywords: wind put barrier option; ARFIMA model; wind power producers; wind market efficiency; weather derivatives market; transition to green energy wind put barrier option; ARFIMA model; wind power producers; wind market efficiency; weather derivatives market; transition to green energy
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MDPI and ACS Style

Rodríguez, Y.E.; Pérez-Uribe, M.A.; Contreras, J. Wind Put Barrier Options Pricing Based on the Nordix Index. Energies 2021, 14, 1177. https://doi.org/10.3390/en14041177

AMA Style

Rodríguez YE, Pérez-Uribe MA, Contreras J. Wind Put Barrier Options Pricing Based on the Nordix Index. Energies. 2021; 14(4):1177. https://doi.org/10.3390/en14041177

Chicago/Turabian Style

Rodríguez, Yeny E.; Pérez-Uribe, Miguel A.; Contreras, Javier. 2021. "Wind Put Barrier Options Pricing Based on the Nordix Index" Energies 14, no. 4: 1177. https://doi.org/10.3390/en14041177

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