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Cutting edge: valuing and dynamically hedging natural gas storage
Natural gas storages are integral parts of gas distribution systems and play a key role in managing demand variations. Risk managers need to value storages on a daily basis, while traders face the challenge of effectively hedging storages. Ali Sadeghi presents a review of the basket-of-options approach for valuation and dynamically hedging the extrinsic value of a natural gas storage. The issue of market parameters and their impact on hedging efficiency is also discussed in detail
![Cutting edge - hedging natural gas storage Cutting edge - hedging natural gas storage](/sites/default/files/styles/landscape_750_463/public/import/IMG/158/201158/shu-77086096-naturalgas-580x358.jpg.webp?itok=hI1YKWYD)
We consider the problem of monetising the extrinsic value of a natural gas storage. The storage is viewed as a basket of calendar spread options and is hedged dynamically using the delta-hedging approach. By way of a real example, we go through the details of the daily corrections in the hedging. The methodology is tested over a six-month period using the Henry Hub daily forward curves and the implied volatilities. Among others, we test the effects of the models errors, parameter estimations and
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