Pricing of Electricity Swing Options

Keppo, Jussi

doi:10.3905/jod.2004.391033

Cited by 53 publications

(32 citation statements)

References 14 publications

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“…The capacitated procurement of the input commodity over a horizon has similarities to the exercise of swing options (Jaillet et al 2004, Keppo 2004. A swing option provides the option holder the flexibility to procure more or less than a baseline amount, at a fixed price, and is subject to volume constraints.…”

Section: Literature Reviewmentioning

confidence: 99%

Integrated Optimization of Procurement, Processing, and Trade of Commodities

Devalkar

Anupindi

Sinha

2011

Operations Research

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We consider the integrated optimization problem of procurement, processing, and trade of commodities in a multiperiod setting. Motivated by the operations of a prominent commodity processing firm, we model a firm that procures an input commodity and has processing capacity to convert the input into a processed commodity. The processed commodity is sold using forward contracts, while the input itself can be traded at the end of the horizon. We solve this problem optimally and derive closed-form expressions for the marginal value of input and output inventory. We find that the optimal procurement and processing decisions are governed by price-dependent inventory thresholds. We use commodity markets data for the soybean complex to conduct numerical studies and find that approximating the joint price processes of multiple output commodities using a single, composite output product and using the approximate price process to determine procurement and processing decisions is near optimal. Compared to a myopic spread-option-based heuristic, the optimization-based dynamic programming policy provides significant benefits under conditions of tight processing capacities and high price volatilities. Finally, we propose an approximation procedure to compute heuristic policies and an upper bound to compare the heuristic against, when commodity prices follow multifactor processes.

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Section: Literature Reviewmentioning

confidence: 99%

Integrated Optimization of Procurement, Processing, and Trade of Commodities

Devalkar

Anupindi

Sinha

2011

Operations Research

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“…With regard to the legal framework of swing agreements and their price structure, the researches drafted in the past years have identified their distinguishing matter (Polo & Scarpa, 2013;Angus, Kavali & Neuhoff, 2008;Holland & Ashley, 2008;Webb, 1991;Medina, McKenzie, & Daniel, 1996) and the mechanics to calculate the pricing structure of the take-or-pay clause (Edoli, Fiorenzani, Ravelli, & Vargiolu, 2013;Keppo, 2004;Kaiser & www.ccsenet.org/ijbm International Journal of Business and Management Vol. 11, No.…”

Section: Literature Overviewmentioning

confidence: 99%

External VS. Internal Audit in the Accounting of Complex Contractual Instruments: A Survey on EU Firms

Celli

2016

IJBM

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This article aims at ascertain if external and independent audit can improve the reliability of IAS/IFRS financial statements with regard to the accounting of complex contractual instruments such as swing contracts for the sale and purchase of energy commodities. To this end, first of all the standard contents of the contracts at stake will be identified, based on those usually recurring in corporate practice. Then, it will be ascertained whether such contracts subtend an industrial usage only, so that the pertinent arrangement has to be accounted as a standard purchase/sale transaction, or whether the counterparts are pursuing financial intendments, since in such assumption the swing contract must be accounted as a financial instrument in accordance with IFRS 9/IAS 39. Conclusively, the modalities will be analysed which are used by a number of European companies whose typical activity is the purchase/sale of energy commodities, to account such kind of contracts. The survey aims at verify if the accounting modalities chosen by companies whose financial statements are subject to an external and independent audit (voluntarily or mandatorily pursuant to the applicable laws) are more compliant with the principle of faithful representation than those which are not subject to an external and independent audit.

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“…An analytical framework for the valuation of option contracts for physical delivery that enable risk-sharing among market participants is developed in [18]. The valuation of a rich family of electricity swing options is carried out in [19] and [20]. Additionally, some relevant references that study real options in electricity markets are shown in [21] and [22].…”

Section: Introductionmentioning

confidence: 99%

Using electricity options to hedge against financial risks of power producers

Pineda

Conejo

2013

J. Mod. Power Syst. Clean Energy

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As a consequence of competition in electricity markets, a wide variety of financial derivatives have emerged to allow market agents to hedge against risks. Electricity options and forward contracts constitute adequate instruments to manage the financial risks pertaining to price volatility or unexpected unit failures faced by power producers. A multi-stage stochastic model is described in this tutorial paper to determine the optimal forward and option contracting decisions for a risk-averse power producer. The key features of electricity options to reduce both price and availability risks are illustrated by using two examples.

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Pricing of Electricity Swing Options

Cited by 53 publications

References 14 publications

Integrated Optimization of Procurement, Processing, and Trade of Commodities

Integrated Optimization of Procurement, Processing, and Trade of Commodities

External VS. Internal Audit in the Accounting of Complex Contractual Instruments: A Survey on EU Firms

Using electricity options to hedge against financial risks of power producers

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