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You need to value your option by using any of the known methods. And then add a spread that will value the risk and the unknown volume. This also take us to the point that it will be traded over the counter. That means that will be a bilateral agreement with the two counterparties. What I will do is value it with a similar process to valuing a swaption, ...


I don't have a huge amount of market experience, but I have traded heat rate options at a merchant generation company and at an investment bank. First off, I disagree Sid Jacobson's answer. Or at least I have never seen a contract with those settlement terms trade. Those terms are, for a heat rate call, eg, final settlement: C = P/G - K, which = P/G - HR, ...

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