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Article

Valuation of Long-Term Flexible Gas Contracts

Lars Holden, Anders Løland and Ola Lindqvist
The Journal of Derivatives Spring 2011, 18 (3) 75-85; DOI: https://doi.org/10.3905/jod.2011.18.3.075
Lars Holden
is a managing director of the Norwegian Computing Center in Oslo, Norway.
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  • For correspondence: lars.holden@nr.no
Anders Løland
is a senior research scientist at the Norwegian Computing Center in Oslo, Norway.
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  • For correspondence: anders.loland@nr.no
Ola Lindqvist
is a research scientist at the Norwegian Computing Center in Oslo, Norway.
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  • For correspondence: ola.lindqvist@gmail.com
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Abstract

Energy derivatives allow consumers and producers of natural gas and electricity to manage what are very complicated fluctuations in demand and supply. In particular, energy demand depends heavily on weather, which is impossible to predict accurately more than a week or two into the future. Long-term supply contracts allow some of this variability to be managed, but it is common to incorporate extensive optionality into them. Maximum and minimum values may be set for the amounts to be purchased in a given time period (day, week, month), but with options to exceed the bounds on a finite number of occasions and possible carry-forward provisions for unused options. Determining the optimal exercise strategy for these options and the appropriate valuation of the contracts that takes option exercise into account are challenging problems. In this article, the authors describe the most common optional features found in the European market for long-term natural gas contracts and offer a useful approach for valuing them, based on least squares Monte Carlo simulation.

  • Copyright © 2011 Norsk Regnesentral. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Derivatives: 18 (3)
The Journal of Derivatives
Vol. 18, Issue 3
Spring 2011
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Valuation of Long-Term Flexible Gas Contracts
Lars Holden, Anders Løland, Ola Lindqvist
The Journal of Derivatives Feb 2011, 18 (3) 75-85; DOI: 10.3905/jod.2011.18.3.075

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Valuation of Long-Term Flexible Gas Contracts
Lars Holden, Anders Løland, Ola Lindqvist
The Journal of Derivatives Feb 2011, 18 (3) 75-85; DOI: 10.3905/jod.2011.18.3.075
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    • FEATURES OF LONG-TERM GAS CONTRACTS
    • VALUATION
    • RESULTS
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