Gas Storage Evaluation

Abstract

In this paper the authors tackle the gas storage evaluation, dividing its value in Intrinsic and Extrinsic. The Intrinsic value is defined at the time t, given the market Forward curve, by the strategy that maximize the P&L, due to the difference between the injection and withdrawal prices, given the physical constraints and feature of the particular Gas Storage, there exists an optimal solution can be computed by linear programming approach. Vice versa than for the Intrinsic value the Extrinsic value appear to be more complicated. In literature we can find different approaches, and its evaluation is subject of interest given the high number of strategies that we can use due to the bid-ask balancing, the spread between prompt and future availability of natural gas, seasonality and weather variations (seasonal and daily averages), the behavior of physical and financial operators, the price and availability of other energy commodities, etc. In order to fit a so high number of scenarios, the authors propose to price the Extrinsic value by a portfolio of exotic financial instruments, whose fair value can be thought as good approximation.

Keywords: Commodities, Exotic Options, Quantitative Finance