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Comprehensive Contract Definition
@ENERGY/Storage covers a comprehensive set of storage contract provisions and operational characteristics:
- General Specifications - capacity, inventory start level, variable injection/withdrawal
intervals.
- Inventory Requirements - a flexible schedule for required minimum and maximum
inventory levels.
- Operational Constraints - a flexible schedule for variable injection and
withdrawal rates with their associated per-unit and fuel costs as functions
of inventory levels ("ratchets").
- Inventory Payout and Penalty Provisions - variable payout structures for
inventory borrowed or loaned at the end of the contract term.
Comprehensive Trading/Hedging Strategies
| Single-Factor Strategies: |
- Rule-based - trading spot using user-defined buy/sell price trigger "rules".
- Optimal - trading spot using optimal buy/sell rules to maximize expected profit.
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| Multi-Factor Strategies: |
- Rolling Intrinsic - trading spot, balance-of-the-month and forward contracts to add profit incrementally, while maintaining a risk-free intrinsic hedge.
- Basket of Spreads - delta hedge storage value as a basket of calendar spread options with forward contracts, while adding profit incrementally through spot and balance-of-the-month trading.
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Multiple Pricing Models
@ENERGY/Storage provides the choice of two different price process models:
- One-factor, lognormal mean-reverting model. Accommodates price and cash volatility term structure.
- Multi-factor, lognormal mean reverting model. Multi-factor seasonal principal component analysis forward curve model that can capture the seasonal correlation and volatility term structures among different forward contracts, while fully matching market implied volatilities. Storage internally calibrates many of the necessary model parameters.
Speed Advantages
@ENERGY/Storage's computational performance is a direct result of highly efficient code implementation - whether it applies to the trinomial tree for the one-factor model or to the customized simplex method for the multi-factor model.
Detailed Valuation Results
Storage values, along with the hedge positions are provided for every strategy. Additional results include:
- Value decomposition (in terms of cost, spread, and inventory payoff).
- Hedge sensitivity curve and other Greeks (e.g. scalar delta).
- Value histograms for viewing value/profit distributions.
- Inventory trajectories for depicting inventory cycling.
- Cash flow and inventory histograms for monitoring of storage operations.
Calibration/Simulation Tools.
For completeness, @ENERGY provides a separate function for calibrating necessary model parameters and for simulating relevant prices. Using the available tools the user can:
- Extract historical (seasonal) price, volatility and correlation averages.
- Fit a set of mean-reversion rates.
- Calibrate model volatilities to account for market-implied volatilities.
- Perform PCA (Principal Component Analyses) on the extracted variance-covariance matrices.
- Simulate (spot and forward) price trajectories and generate price
histograms.
View the @ENERGY/Storage product profile .
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