Research On Pricing Carbon Financial Derivatives Based On EUETS

Efficient pricing of carbon derivative product is the core of EUETS system, which plays an important role in keeping stability and developing carbon financial markets. The volatility of the underlying assets is the essential factor, so how to get the features of the volatility effectively becomes a key problem. Although the B-S model gives a classic tool for option pricing, it is based on the assumption that the volatility is constant. As more and more research find that financial data exist fat-tail and high kurtosis, the volatility is constant assumption is not suitable. if we get the features of the random walk of the change volatility effectively ,which will contribute much on pricing derivative carbon products.In this paper we first analysis the carbon emissions trading market, and then we use GARCH model to appropriately reproduce the EUA futures' returns dynamics. After that we use Monte Carlo simulation to value the derivatives under a risk neutral framework. We get two conclusions: one is that GARCH (1, 1) model to appropriately reproduce the futures dynamics. The other is that Monte Carlo simulation options provide an indication of fair pricing. Finally, we had some research on our carbon finance for the purpose of increasing pricing power for our country, the deserving the shortcomings and the further studying are also pointed out.