The primary problem in pricing electricity derivatives is that
A)the volatility cannot be measured
B)the underlying asset cannot be stored
C)electricity is a homogeneous product
D)the demand for electricity is unpredictable
E)the electricity market is unregulated

Question

Quizplus · Accepted Answer

The primary problem in pricing electricity derivatives is that the underlying asset, i.e., electricity, cannot be stored. This creates difficulties in hedging, as the buyer of the derivative cannot physically possess the underlying asset, leading to pricing complexities. The other choices do not accurately reflect the primary problem in pricing electricity derivatives.

The Primary Problem in Pricing Electricity Derivatives Is That