2d • 💻 Applied Modeling
Real Options & Energy Trading
Sharing an experience about Real Options . So , I recently worked using Real Options . I implemented this approach at a large energy company in their trading division, and it's honestly one of the most widely used tools when you're dealing with assets like power plants, or long-term supply contracts.
The idea is simply apply the theory . Real Option is the right, but not the obligation, to make a business decision in the future.
In energy trading, almost every physical asset is essentially a bundle of options.
I worked on a gas-fired power plant, which is really an option to convert gas into electricity whenever the spread between the two prices is profitable, and to shut down when it isn't.
I also worked on gas storage units. A gas storage is an option to buy when prices are low and sell when they're high.
If you price these assets without accounting for that flexibility, you'll consistently undervalue them and miss good trades, or overpay because you didn't realise the optionality you were buying.
I am sharing one part of a source I had used to build some models. It is extremely good to know what real options is .
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Real Options & Energy Trading
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