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Primary Article

Gas Storage Valuation Using a Monte Carlo Method

Alexander Boogert and Cyriel de Jong
The Journal of Derivatives Spring 2008, 15 (3) 81-98; DOI: https://doi.org/10.3905/jod.2008.702507
Alexander Boogert
A senior quantitative analyst at Essent Energy Trading in 's-Hertogenbosch, The Netherlands. He is pursuing a Ph.D. degree in the Commodities Finance Centre at Birkbeck College, The University of London.
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  • For correspondence: alexander.boogert@essent.nl
Cyriel de Jong
Partner at Maycroft Consulting and affiliated with the Rotterdam School of Management, Erasmus University, The Netherlands.
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  • For correspondence: dejong@maycroft.com
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Abstract

Storage in the energy business is a major issue. Electricity can hardly be stored at all, while crude oil is best “stored” by not pumping it out of the ground in the first place. Natural gas occupies a kind of middle position. In the natural gas market, storage facilities which permit smoothing over time of the gas they supply to the market are an important component of the supply chain. Optimal management of a storage facility entails dealing with both physical constraints and fluctuating demand. This, in turn, gives rise to contingencies that can be thought of as American options. The valuation of the facility as an investment entails solving for the expected present value of future profits, assuming optimal management. In this article, the authors show how to address this difficult valuation problem by adapting the numerical methods for pricing American options using Least Squares Monte Carlo simulation to the technology of gas storage

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Vol. 15, Issue 3
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Gas Storage Valuation Using a Monte Carlo Method
Alexander Boogert, Cyriel de Jong
The Journal of Derivatives Feb 2008, 15 (3) 81-98; DOI: 10.3905/jod.2008.702507

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Gas Storage Valuation Using a Monte Carlo Method
Alexander Boogert, Cyriel de Jong
The Journal of Derivatives Feb 2008, 15 (3) 81-98; DOI: 10.3905/jod.2008.702507
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