Articlegreen2008

Monte Carlo valuation of natural gas investments

Luis M. Abadie · José Manuel Chamorro Gómez

40 citations0/0 files storedReview of Financial Economics

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Capital Investment and Risk Analysis Stochastic processes and financial applications Financial Reporting and Valuation Research

Abstract

Abstract In this evaluation of energy assets related to natural gas, our particular focus is on a base load natural gas combined cycle power plant and a liquefied natural gas facility in a realistic setting. We also value several American‐type investment options following the least squares Monte Carlo approach. We calibrate mean‐reverting stochastic processes for gas and electricity prices by using data from NYMEX NG futures contracts and the Spanish wholesale electricity market, respectively. Additional sources of uncertainty concern the initial investment outlay, or the option's time to maturity, or the cost of CO2 emission permits.

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References

1994Investment Under Uncertainty.1994Investment under Uncertainty 2001Valuing American Options by Simulation: A Simple Least-Squares Approach 1989Handbooks in operations research and management science 1985Evaluating Natural Resource Investments 1996Real Options: Managerial Flexibility and Strategy in Resource Allocation 1997The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging 1996Real options: Managerial flexibility and strategy in resource allocation

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2013Linepack storage valuation under price uncertainty 2012Strategic analysis of technology and capacity investments in the liquefied natural gas industry

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