Heat rate call option valuation

That's a complicated subject. Keep in mind that some plants produce electricity by simply burning coal. Some by gas fired turbines with secondary heat recovery. Some by other means.

And, some of those plants produce only power while others produce products power is a sideline. The economics of each plant is different, and those numbers change rapidly. As a result, pricing a plant specific heat rate versus a market heat rate can be a real humbling experience. I've watched that game from the sidelines long enough to know that I don't know anything about it. A Heat Rate Option is a standard contract traded bi-laterally or on an exchange where the ratio between Electricity at an agreed location and Natural Gas at an agreed location is the strike price for an agreed quantity at an agreed expiration date.

commodities - What is a Heat Rate Option? - Quantitative Finance Stack Exchange

An option holder may want to buy a call with a strike price of 12, so they are capped from the risk of higher Market Implied Heat Rates. The above whitepapers address the operational heat rate performance of a generating plant, which is difficult to replicate in the secondary physical or derivative markets.

I don't have a huge amount of market experience, but I have traded heat rate options at a merchant generation company and at an investment bank. First off, I disagree Sid Jacobson's answer. Or at least I have never seen a contract with those settlement terms trade.

commodities - What is a Heat Rate Option? - Quantitative Finance Stack Exchange

Those terms are, for a heat rate call, eg, final settlement: So working from the example given, I'll change it around. Supposed the strike is a 10x heat rate and final settlement is 12x.

So to plug in: Or 2x the final gas price. Ok, that could forex killer ea download, but I've heat rate call option valuation seen it. But there's lots I probably haven't seen. What I have seen trade between multiple generators and banks is called a heat rate option but might more sensibly be called a spark spread option, given that the above sounds like what singapore dollar rate against indian rupee HR opt should be.

Both the heat rate and the strike are fixed in the contract terms.

Strike can be zero or negative. Sometimes called VOM, I think variable operations and maintenance. The call has two underlyings, power and gas.

In theory, either leg could settle either physically or financially. In practice I've always seen gas settled financially, and the power can be phys or fin.

When both are fin, the holder bills the seller for the final settlement amount. We could imagine both legs phys, where holder takes power and delivers gas, but I haven't seen it. The two equations I've compared above can be rearranged into each other. But to speak literally of contract terms, I have only seen the form I give. And I have seen that one many times. I have seem some quotes on broker sheets.

It 1987 global stock market crash be nice to have something listed. But I think they haven't been. By posting your answer, you agree to the privacy policy and terms of service.

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Join them; it only takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. What is a Heat Rate Option? I tried a search with google but I can't find a clear definition of what a Heat Rate Option is.

I would appreciate if someone could explain to me what this type of option is. My understanding is that it has to do with energy options but I am not sure on the underlying. Financial Economist 81 1 1 6. Here's a previous discussion: The documents you provided look promising on getting at least basic understanding of the issue. Unfortunately it looks like most of these links are now dead.

This allows holder the ability to manage the the cost of the Market Implied Heat Rate. Sid Jacobson 21 1. Sign up or log in StackExchange. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name. Quantitative Finance Stack Exchange works best with JavaScript enabled. MathOverflow Mathematics Cross Validated stats Theoretical Computer Science Physics Chemistry Biology Computer Science Philosophy more 3.

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