Gas Storage and Supply Guarantees : An Optimal Switching Approach

We consider the valuation of gas storage on finite horizon. Focusing on the timing optionality of storage we construct a stochastic control model that reduces to solving an optimal switching problem with inventory. Extending the methodology from Carmona and Ludkovski (2005), we then construct a robust numerical scheme based on Monte Carlo regressions. The idea is to simultaneously approximate the optimal switching times along all the simulated paths. The main difficulty is dealing with the path-dependent inventory. The scheme is compared to the traditional quasi-variational framework and illustrated with a variety of concrete examples. We also consider related problems of interest, such as supply guarantees and natural resource management.

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