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Abstract
The aim of this article is to use a new modeling technique for CO2 emission prices to estimate the risk associated with a related, structured product. After a short discussion of the specificities of this market, the author investigates several modeling methods for CO2 emission prices and uses these results for risk modeling of the swap between two CO2-related instruments: the European Union allowances and the certified emission reductions. We also estimate the counterparty risk for this kind of transaction and evaluate the impact of different models on the risk measure and the allocated capital.
TOPICS: ESG investing, fixed income and structured finance, developed markets, legal/regulatory/public policy
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