Customized derivatives pricing software developed for major electric utility company

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A major electric utility was dissatisfied with existing methods for pricing electricity derivatives, including electricity forwards, options, and structured supply contracts.

The utility recognized that pricing approaches which applied in financial markets (and some other commodity markets) were inappropriate for electricity due to the unique characteristics of this product. Prescio Consulting proposed and implemented a novel valuation and risk measurement approach that addressed the utility’s concerns about traditional pricing approaches.

The Prescio Consulting approach exploits the transparency of the fundamentals in the power market and explicitly models the effects of the non-storability of power, the seasonality of demand, and the non-linearity of power prices. Prescio Consulting used this model to create a customized derivatives pricing software for the client.