UK Gas Markets: the Market Price of Risk and Applications to Multiple Interruptible Supply Contracts
Energy Economics, Volume 30, Issue 3, pages 829-846, May 2008
29 Pages Posted: 4 Oct 2006 Last revised: 11 Mar 2013
Date Written: August 1, 2006
Abstract
We employ the Schwartz and Smith (2000) model to explore the dynamics of the UK gas markets. We discuss in detail the short-term and long-term market prices of risk borne by the market players and how deviations from expected cyclical storage affect the short-term market price of risk. Finally, we illustrate an application of the model by pricing interruptible supply contracts that are currently traded in the UK.
Keywords: Interruptible supply contracts, gas markets, commodities, market price ofshort-term and long-term risk, multi-exercise Bermudan options, convenience yield
JEL Classification: G12, G13
Suggested Citation: Suggested Citation