Commodity Storage Valuation
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Fri, 11/05/2012 12:30 |
Prof Kumar Muthuraman (Univerity of Texas at Austin) |
Nomura Seminar  |
Oxford-Man Institute |
| We present a general valuation framework for commodity storage facilities, for non-perishable commodities. Modeling commodity prices with a mean reverting process we provide analytical expressions for the value obtainable from the storage for any admissible injection/withdrawal policy. Then we present an iterative numerical algorithm to find the optimal injection and withdrawal policies, along with the necessary theoretical guarantees for convergence. Together, the analytical expressions and the numerical algorithm present an extremely efficient way of solving not only commodity storage problems but in general the problem of optimally controlling a mean reverting processes with transaction costs. | |||