1.1 Electricity Swaps and Swaptions

1.1 Electricity Swaps and Swaptions
The most liquidly traded products on energy exchanges like EEX or Nordpool are
contracts of futures type. These are agreements traded at time t  0 for a constant
delivery of 1 MW of electricity over a certain future period of time [T1, T2], while in
return a fixed rate F(t; T1, T2) is paid during this delivery period. Since a payment of
a fixed rate is made in exchange for the (unknown) future spot price, these contracts
are also known as electricity swaps. The relation of spot and forward prices is not
clearly defined for electricity because of its non-storability [2, 5]. This difficulty can be
avoided by directly modeling the forward curve under a risk neutral (with respect to
swap rates) measure [1, 3, 18]. For every maturity u 2 [T1, T2], let
f (t, u) := lim
v!u
F(t; u, v)
be the corresponding value of the forward curve at time t  u. Due to no-arbitrage
considerations, the following equality must hold for every t  T1.
Z T2
T1
e