A closed-form solution for the price of cross-commodity electricity derivatives

We present a method for the valuation of two types of cross-commodity electricity options, European spark spread options and locational spread options. Since the underlying assets here are non-tradeable, the methodology of Black–Scholes–Merton cannot be directly applied. Nevertheless, assuming only absence of arbitrage we provide a closed-form analytic formula for the price of the derivatives in the case where the spot prices of the underlying process follow an exponential Ornstein–Uhlenbeck process.