Pricing and Risk Hedging Strategies for Carbon Financial Derivatives under the Process of Carbon Market Integration

Abstract

With the expansion of deep international climate governance, carbon market integration has become an important trend in enhancing coordinated carbon emissions governance, opening up brand-new development prospects for the carbon financial derivatives market. This article systematically studies the development history of carbon market integration, describes types, features, and roles of carbon financial derivatives, and studies pricing model applicability and hedging strategy applicability in integrated scenarios. Studies indicate that carbon financial derivatives optimize carbon market liquidity and stability via price exploration and hedging of risks. But their prices must respond to policy-driven and non- linear volatility of carbon prices, whilst hedging strategies of risks must cope with cross-market linkages of prices and uncertainty of policy. Although carbon market integration creates positive conditions for pricing and hedging of derivatives via unified rules and improved disclosure of data, it also expands complexity via poor policy coordination and heterogeneity of markets. This article suggests enhancing policy coordination of global carbon markets, upgrading regulatory and disclosure mechanisms of data, promoting financial innovation to create diversification derivative instruments, and extending tech support to small and medium-sized companies to enhance sustainable development of the carbon financial market.