Wind Put Barrier Options Pricing Based on the Nordix Index

• Published in: Energies (Basel) Vol. 14; no. 4; p. 1177
• Main Authors: Rodríguez, Yeny E., Pérez-Uribe, Miguel A., Contreras, Javier
• Format: Journal Article
• Language: English
• Published: Basel MDPI AG 23-02-2021
• Subjects: Alternative energy sources; ARFIMA model; Barriers; El Nino; Elasticity of demand; Electric power generation; Electricity; Electricity distribution; Energy prices; Energy sources; Fluctuations; Futures; Generators; Hedging; Market prices; Put & call options; Rain; Renewable energy sources; Securities prices; Stochastic models; transition to green energy; Volatility; Weather; weather derivatives market; Wind barriers; Wind engineering; wind market efficiency; Wind power; wind power producers; wind put barrier option; Wind speed; Wind variations
• ISSN: 1996-1073; 1996-1073
• DOI: 10.3390/en14041177

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.