Browsing by Author "Ogunsolu, Mobolaji Olutomi"

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    Optimal valuation of natural gas storage
    (2012) Ogunsolu, Mobolaji Olutomi; Ware, Antony F.
    This thesis focuses on the valuation of natural gas storage. We investigate the peculiar behavior of gas prices including the distribution of log returns, mean reversion and sea­sonality. We then model natural gas spot prices as a two-factor stochastic differential equation with mean reversion and seasonality properly accounted for in the model. These characteristics are common to commodities ( electricity, gas, agricultural products), un­like other financial assets (for example stocks, bonds etc.) whose availability and usage are not seasonal in nature and whose prices do not tend to revert back to an average long term mean. In addition, we also exploit the relationship between spot prices and futures prices to model and calibrate natural gas price spot and futures prices. Using the two-factor gas price model, we model the value of a gas storage as a stochastic control problem [8]. The timing optionality of the gas storage problem makes it similar to a constrained American option on the inter-temporal spread of gas prices. This problem can be solved by extending the Least Squares Monte Carlo (LSM) approach of Longstaff and Schwartz (2001) for pricing early exercise options [20].