Pricing of options on European Co2 allowance futures using discontinous Galerkin method

Abstract

Emission allowances constitute a key tool in reducing greenhouse gas emissions in order to minimise the impact of global economy on the increase of global mean temperature. In order to support liquid trading with the allowances and related derivative products, ability to detect the fair price is needed. In this paper we have developed efficient numerical approach based on discontinuous Galerkin method for pricing of European options on CO2 EUA futures contracts. An experimental study with various maturities and underlying volatilities shows apparent improvement against alternative study using conventional finite value method.