A practical problem for energy companies is instituting a consistent framework across its supply and trading activities to deliver on
all-important P&L and at-Risk reporting requirements. With a focus
on storage assets and wider natural gas market exposures, we present
a gas storage valuation methodology, which uniquely uses a flexible
multifactor Lévy process setting that allows for consistent valuation and risk management reporting across a general derivative book. Our
approach is capable of replicating the complex covariance structure
of the natural gas forward curve and capturing time spread volatility, a key driver of extrinsic storage value, while being simultaneously
capable of accurately calibrating to market traded options. We begin by extending a single factor Mean Reverting Variance Gamma
process to an arbitrary number of dimensions and, by way of specific
examples, show how the traditional Principal Component Analysis
based view of gas forward curve dynamics can be incorporated into a
primarily market based valuation. We develop in the process an innovative implied moments based calibration technique, which allows
for efficient calibration of general multifactor forward curve models to
delivery period options common in energy and commodity markets.
Furthermore, to accommodate the forward curve and traded options
market consistency, we propose an appropriate joint market based
calibration and historical estimation methodology. Through a formal
model specification analysis, we provide evidence that the multifactor
Lévy models we propose provide a better joint fit to NBP natural
gas options-forward market data, relative to comparative benchmark
models. Finally, we develop a novel multidimensional fast Fourier
transform based storage valuation algorithm and provide empirical
evidence that the multifactor Lévy model suite is better specified to
more accurately capture extrinsic value.
Metadata
Item Type:
Article (Published)
Refereed:
Yes
Uncontrolled Keywords:
gas storage valuation; multifactor Lévy processes; Mean Reverting Variance Gamma processes; implied moments calibration; fast Fourier transform.