Option Pricing Practices Based on the B-S-M Model in Carbon Markets

Abstract

Carbon trading refers to the buying and selling of carbon emission allowances, stimulating businesses to adopt low-carbon development strategies through price signals. By allocating limited emission allowances to emitters, the carbon market encourages the reduction of carbon emissions to achieve emission reduction targets. Market participants can compensate for emissions exceeding their own quotas by trading carbon emission allowances, thus minimizing the cost of emission reductions. The Chinese carbon market has a large trading volume and numerous development opportunities, but currently, the carbon financial market is not fully open. In comparison to Western countries, China lacks carbon emission derivatives such as futures, options, and swap contracts. The risk and return of carbon emission allowance options are estimated and managed using the B-S-M option pricing model. This paper utilizes data from the Shenzhen Carbon Emission Allowance Exchange as a sample to conduct option pricing practices for carbon emission allowances using the B-S-M model. The aim is to promote research and development in the carbon emission allowance market and contribute to the achievement of emission reduction goals.