European Union emission trading scheme: A model for valuation and hedging of emission unit allowances derivatives

Valerio Gagliardi

Student thesis: Master thesis

Abstract

The European Union C02 Allowances (EUAs) are traded on several markets with increasing intensity. The market structure derived from the Kyoto Protocol regulations is presented in the paper. The aims of this thesis are to develop a price estimation model of European Union Emission Allowances (EUAs) and risk management methods for companies participating in the EUA market. Statistical and econometrical analysis on spot prices are performed in order to assess the main characteristics of the price dynamics that need to be incorporated in the model. A stochastic volatility model with a jump component is implemented in a VBA framework, through a Monte Carlo simulation. The model is tested for pricing and hedging against the Bluenext and European Climate Exchange (ECX) prices.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2009
Number of pages89