Matt Thompson received his Ph.D. in Applied Mathematics from the University of Western Ontario. Prior to joining Queen’s School of Business, Matt worked as a financial risk management consultant with Ontario Power Generation.Matt’s research interests lie in the application of modern financial engineering techniques to optimization problems in the energy sector. Matt’s doctoral dissertation, “Real Options Valuation and Optimization of Energy Assets” received an honourable mention in the George B. Dantzig Dissertation competition, for the best doctoral dissertation in any area of Operations Research or the Management Sciences. One of Matt’s recent papers won first prize in the National Student Paper Competition sponsored by the Canadian Operations Research Society and has been accepted for publication in Operations Research. In October, 2003, the U.S. Institute For Operations Research and the Management Sciences selected a presentation based upon Matt’s research for the 2003 best Presentation in an Energy Sponsored Session Award.
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Co-author 1: Matt Davison
Co-author 2: Henning Rasmussen
In this paper we present an algorithm for the valuation and optimal operation of natural gas storage facilities. Real options theory is used to derive nonlinear partial-integro-differential equations (PIDEs) for the valuation and optimal operating strategies. The equations are designed to incorporate a wide class of spot price models that can exhibit the same time-dependent, mean-reverting dynamics and price spikes as those observed in most energy markets. Particular attention is paid to the operational characteristics of real storage units, these characteristics include: working gas capacities, variable deliverability and injection rates and cycling limitations. We illustrate the model with a numerical example of a salt cavern storage facility that clearly shows how a gas storage facility is like a financial straddle with both put and call properties. Depending on the amount of gas in storage the relative influence of the put and call components vary.
In this paper we present an algorithm for the valuation and optimal operation of natural gas storage facilities. Real options theory is used to derive nonlinear partial-integro-differential equations (PIDEs) for the valuation and optimal operating strategies. The equations are designed to incorporate a wide class of spot price models that can exhibit the same time-dependent, mean-reverting dynamics and price spikes as those observed in most energy markets. Particular attention is paid to the operational characteristics of real storage units, these characteristics include: working gas capacities, variable deliverability and injection rates and cycling limitations. We illustrate the model with a numerical example of a salt cavern storage facility that clearly shows how a gas storage facility is like a financial straddle with both put and call properties. Depending on the amount of gas in storage the relative influence of the put and call components vary.