Pricing Commodity Derivatives with Basis Risk and Partial Observations

  title={Pricing Commodity Derivatives with Basis Risk and Partial Observations},
  author={Ren{\'e} Carmona and Michael Ludkovski},
We study the problem of pricing claims written on an over-the-counter energy contract. Because the underlying is illiquid, we work with an indifference pricing framework based on a liquid reference contract. Extending current convenience yield frameworks we propose a two-factor partially observed model for the benchmark asset. Moreover, we incorporate direct modeling of the unhedgeable basis. We then study the value function corresponding to utility pricing with exponential utility. After… CONTINUE READING


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