The Black-Scholes model is not appropriate for pricing electricity derivatives.

Question

Quizplus · Accepted Answer

The Black-Scholes model assumes constant volatility and continuous trading of assets, which are not applicable to electricity markets which are subject to high volatility and intermittent trading. Therefore, it is not appropriate for pricing electricity derivatives. Alternative models such as the Heath-Jarrow-Morton model or the Jump Diffusion model are used for pricing electricity derivatives.

The Black-Scholes Model Is Not Appropriate for Pricing Electricity Derivatives