In this paper we study the pricing and hedging of structured products in energy markets, such as swing and virtual gas storage, using the exponential utility indifference pricing approach in a general incomplete multivariate market model driven by fi
nitely many stochastic factors. The buyer of such contracts is allowed to trade in the forward market in order to hedge the risk of his position. We fully characterize the buyers utility indifference price of a given product in terms of continuous viscosity solutions of suitable nonlinear PDEs. This gives a way to identify reasonable candidates for the optimal exercise strategy for the structured product as well as for the corresponding hedging strategy. Moreover, in a model with two correlated assets, one traded and one nontraded, we obtain a representation of the price as the value function of an auxiliary simpler optimization problem under a risk neutral probability, that can be viewed as a perturbation of the minimal entropy martingale measure. Finally, numerical results are provided.
This work is concerned with the theory of initial and progressive enlargements of a reference filtration F with a random time {tau}. We provide, under an equivalence assumption, slightly stronger than the absolute continuity assumption of Jacod, alte
rnative proofs to results concerning canonical decomposition of an F-martingale in the enlarged filtrations. Also, we address martingales characterization in the enlarged filtrations in terms of martingales in the reference filtration, as well as predictable representation theorems in the enlarged filtrations.
