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Dirty Spark Spread


A spark spread that captures the gross margin reflecting the economics of a coal-fired power plant. More specifically, it refers to the difference between selling power and buying coal to generate that power. Technically speaking, the dirty spark spread is the difference between the revenue from selling one MWh of electricity from a coal-fired power plant using the amount of coal necessary to generate that much of electricity. This spread can also be achieved by using futures on both electricity and coal. Just as an electricity generator buys coal to produce and sell electric power at a given gross margin, a trader or investor could do the same at the “paper” level, purchasing coal futures and selling electricity futures.

Whether a spread is purchased or sold depends on the needs of an end user of electricity futures. That is, if an investor wishes to buy a spread, he buys electricity futures and sells coal futures. In the opposite case (selling a spread), he buys coal futures and sells electricity futures.

The dirty spark spread is also known as the dark spark spread.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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