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Int. J. Financial Stud. 2018, 6(1), 27; https://doi.org/10.3390/ijfs6010027

Gas Storage Valuation and Hedging: A Quantification of Model Risk

1
IAE Paris, Université Paris I-Panthéon Sorbonne, 75006 Paris, France
2
Ismail Laachir, Zeliade Systems, 56 Rue Jean-Jacques Rousseau, 75001 Paris, France
3
Francesco Russo, ENSTA ParisTech, Unité de Mathématiques Appliquées, 91120 Palaiseau, France
*
Author to whom correspondence should be addressed.
Received: 1 December 2017 / Revised: 8 February 2018 / Accepted: 23 February 2018 / Published: 5 March 2018
(This article belongs to the Special Issue Finance, Financial Risk Management and their Applications)
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Abstract

This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The contributions of this paper are two-fold. Firstly, we propose a model that unifies the dynamics of the futures curve and spot price, and accounts for the main stylized facts of the US natural gas market such as seasonality and the presence of price spikes in the spot market. Secondly, we evaluate the associated model risk, and show not only that the valuation is strongly dependent upon the dynamics of the spot price, but more importantly that the hedging strategy commonly used in the industry leaves the storage operator with significant residual price risk. View Full-Text
Keywords: energy markets; commodities; natural gas storage; model uncertainty energy markets; commodities; natural gas storage; model uncertainty
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Hénaff, P.; Laachir, I.; Russo, F. Gas Storage Valuation and Hedging: A Quantification of Model Risk. Int. J. Financial Stud. 2018, 6, 27.

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