Energy structured deals: dynamic vs quasi-static hedging
Traditional pricing and hedging approaches often fail to work properly for complex energy structures due to market incompleteness, liquidity problems or unusual price dynamics. In this article, Stefano Fiorenzani suggests some specific adjustments that can be used to obtain reasonable pricing and hedging results
Energy structured products can be described as particular types of derivative instruments. Hence it was natural for market agents to tackle pricing and hedging problems related to this problem using traditional techniques developed for standard derivatives. However, it is a well known fact that traditional pricing and hedging approaches often fail to work properly for complex energy structures due to market incompleteness issues (non-perfect replication), liquidity problems or unusual price
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