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The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching

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The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching. / Chiarella, Carl; Clewlow, Les; Kang, Boda.

In: International Journal of Theoretical and Applied Finance, Vol. 19, No. 1, 1650005, 04.02.2016.

Research output: Contribution to journalArticle

Harvard

Chiarella, C, Clewlow, L & Kang, B 2016, 'The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching', International Journal of Theoretical and Applied Finance, vol. 19, no. 1, 1650005. https://doi.org/10.1142/S0219024916500059

APA

Chiarella, C., Clewlow, L., & Kang, B. (2016). The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching. International Journal of Theoretical and Applied Finance, 19(1), [1650005]. https://doi.org/10.1142/S0219024916500059

Vancouver

Chiarella C, Clewlow L, Kang B. The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching. International Journal of Theoretical and Applied Finance. 2016 Feb 4;19(1). 1650005. https://doi.org/10.1142/S0219024916500059

Author

Chiarella, Carl ; Clewlow, Les ; Kang, Boda. / The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching. In: International Journal of Theoretical and Applied Finance. 2016 ; Vol. 19, No. 1.

Bibtex - Download

@article{225b0272e51944d88c0924e3082cd39b,
title = "The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching",
abstract = "A typical gas sales agreement (GSA), also called a gas swing contract, is an agreement between a supplier and a purchaser for the delivery of variable daily quantities of gas, between specified minimum and maximum daily limits, over a certain number of years at a specified set of contract prices. The main constraint of such an agreement that makes them difficult to value is that in each gas year there is a minimum volume of gas (termed take-or-pay or minimum bill) for which the buyer will be charged at the end of the year (orpenalty date), regardless of the actual quantity of gas taken. We propose a framework for pricing such swing contracts for an underlying gas forward price curve that follows a regime-switching process in order to better capture the volatility behaviour in such markets. With the help of a recombining pentanomial tree, we are able to efficiently evaluate the prices of the swing contracts, find optimal daily decisions and optimal yearly use of both the make-up bank and the carry forward bank at different regimes. We also showhow the change of regime will affect the decisions. ",
author = "Carl Chiarella and Les Clewlow and Boda Kang",
note = "Date of acceptance: 05/10/2015",
year = "2016",
month = feb,
day = "4",
doi = "10.1142/S0219024916500059",
language = "English",
volume = "19",
journal = "International Journal of Theoretical and Applied Finance",
issn = "0219-0249",
publisher = "World Scientific Publishing Co. Pte Ltd",
number = "1",

}

RIS (suitable for import to EndNote) - Download

TY - JOUR

T1 - The Evaluation of Multiple Year Gas Sales Agreement with Regime Switching

AU - Chiarella, Carl

AU - Clewlow, Les

AU - Kang, Boda

N1 - Date of acceptance: 05/10/2015

PY - 2016/2/4

Y1 - 2016/2/4

N2 - A typical gas sales agreement (GSA), also called a gas swing contract, is an agreement between a supplier and a purchaser for the delivery of variable daily quantities of gas, between specified minimum and maximum daily limits, over a certain number of years at a specified set of contract prices. The main constraint of such an agreement that makes them difficult to value is that in each gas year there is a minimum volume of gas (termed take-or-pay or minimum bill) for which the buyer will be charged at the end of the year (orpenalty date), regardless of the actual quantity of gas taken. We propose a framework for pricing such swing contracts for an underlying gas forward price curve that follows a regime-switching process in order to better capture the volatility behaviour in such markets. With the help of a recombining pentanomial tree, we are able to efficiently evaluate the prices of the swing contracts, find optimal daily decisions and optimal yearly use of both the make-up bank and the carry forward bank at different regimes. We also showhow the change of regime will affect the decisions.

AB - A typical gas sales agreement (GSA), also called a gas swing contract, is an agreement between a supplier and a purchaser for the delivery of variable daily quantities of gas, between specified minimum and maximum daily limits, over a certain number of years at a specified set of contract prices. The main constraint of such an agreement that makes them difficult to value is that in each gas year there is a minimum volume of gas (termed take-or-pay or minimum bill) for which the buyer will be charged at the end of the year (orpenalty date), regardless of the actual quantity of gas taken. We propose a framework for pricing such swing contracts for an underlying gas forward price curve that follows a regime-switching process in order to better capture the volatility behaviour in such markets. With the help of a recombining pentanomial tree, we are able to efficiently evaluate the prices of the swing contracts, find optimal daily decisions and optimal yearly use of both the make-up bank and the carry forward bank at different regimes. We also showhow the change of regime will affect the decisions.

U2 - 10.1142/S0219024916500059

DO - 10.1142/S0219024916500059

M3 - Article

VL - 19

JO - International Journal of Theoretical and Applied Finance

JF - International Journal of Theoretical and Applied Finance

SN - 0219-0249

IS - 1

M1 - 1650005

ER -