The market price of jump risk for delivery periods: pricing of electricity swaps with geometric averaging

In this paper, we extend the market price of risk for delivery periods (MPDP) of electricity swap contracts by introducing a dimension for jump risk. As introduced by Kemper et al. [ 30 ], the MPDP arises through the use of geometric averaging while pricing electricity swaps in a geometric framework. We adjust the work by Kemper et al. [ 30 ] in two directions: First, we examine a Merton type model taking jumps into account. Second, we transfer the model to the physical measure by implementing mean-reverting behavior. We compare swap prices resulting from the arithmetic (approximated) average to the geometric weighted average. Under the physical measure, we discover a decomposition of the swap’s market price of risk into the instantaneous market price of risk and the MPDP.