FRSGlobal, a regulatory reporting and risk management firm, is working with the Institute of Data Analysis and Process Design of Zurich University of Applied Science (ZHAW) to create a theoretical foundation to gauge fair value pricing of emission-linked derivatives contracts. Professors Wolfgang Breyman (ZHAW) and Jury Hinz (National University of Singapore) are leading the CTI1 project, in conjunction with risk experts from FRSGlobal.
The research targets two key areas to ensure high-performance and rapid calculation:
- The modelling of the martingale dynamics of futures contracts on emission allowances.
- The implementation of quasi closed-form expressions for European call options on emission allowance futures.
The results of the project will be incorporated into FRSGlobal’s RiskPro risk management suite and presented over 2010/11.
Thomas Brouwer, head of product management, FRSGlobal, said: “The emission markets are being established globally and are growing rapidly. The increasing liquidity in trading futures on greenhouse gas emission allowances has led to the trading of emission-linked derivatives. The current problem faced by the industry is that no theoretical foundation for pricing of these contracts is available, and this research and development places FRSGlobal at the forefront of making this a reality.”
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