Applying Theorem of Ross to Transition Probability Matrix in Energy Options Pricing after Political Tensions and Russia-Ukraine Conflict

Alexey Mikhaylov, Tsangyao Chang, Aigul Mukhanova, Akmaral Bukharbayeva, Zuleima Karpyn

Research output: Contribution to journalArticlepeer-review

Abstract

Probability Matrix, it is necessary to obtain energy options pricing. The paper found the true probabilities of transition from the current state of the market to other states. The energy options pricing including effects of Political tensions is proposed. The methods are based on true probabilities of transition to the next state of the energy market. It can be used to predict the movement of the underlying asset of energy options (oil and gas derivatives pricing). For example, one strategy might be to compare the energy sources at the beginning 2022 (before 24.02.2024) with the current state of the market. The results show that this matrix can be implemented in energy options pricing, which represents the true probabilities of transition from the current state of the market to modern state. Practical implementation is an investment strategy in oil and gas futures that should include the median of a given distribution with the current state of the market after beginning of Russia-Ukraine conflict. The absence of arbitrage opportunities is a fundamental principle underlying modern financial pricing theory. This concept is peculiar to the statement of the fundamental theorem of asset pricing. The results prove idea that at a fixed point in time is the information about some market quotations of American Call options can be determined. The results have a set of quotes that are available in both directions: both for strikes and for periods to maturity.

Original languageEnglish (US)
Pages (from-to)1715-1726
Number of pages12
JournalEnergy Exploration and Exploitation
Volume42
Issue number5
DOIs
StatePublished - Sep 2024

All Science Journal Classification (ASJC) codes

  • Renewable Energy, Sustainability and the Environment
  • Nuclear Energy and Engineering
  • Fuel Technology
  • Energy Engineering and Power Technology

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