Optimal valuation of natural gas storage
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2012
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Abstract
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 seaÂsonality. 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), unÂlike 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].
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Bibliography: p. 85-87
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Ogunsolu, M. O. (2012). Optimal valuation of natural gas storage (Master's thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/4626