Swing options are typical components of gas contracts, which offer the opportunity to vary the contracted volume under a number of restrictions. They are also known as Take-or-Pay (ToP), interruptible and variable load contracts.
Each day in the contract period, the swing valuation advises how much gas should be taken from the contract. Boundary prices show above which price the maximum contract quantity should be nominated, and below which price the minimum quantity should be nominated. Together with boundary prices of other storage assets and swing contracts, a portfolio manager can rank the assets from low opportunity cost to high opportunity cost, creating an internal merit order for portfolio optimization.
KySwing advises what forward transactions are optimal to hedge the risks and lock in profits. The user can choose between intrinsic and delta hedging, two strategies to secure profits. It can provide hedge recommendations for the asset alone, for multiple assets together or for a portfolio of assets.
The swing model calculates the fair price of a swing contract. The model shows which part of the value is intrinsic, and can be made easily, and which part is extrinsic, requiring a more active trading strategy. Extrinsic values are derived from an intuitive and realistic Monte Carlo simulation model.
A combination of forward and spot trading strategies is applied to the simulated price scenarios, using rolling intrinsic and least-squares Monte Carlo. This type of valuation provides a fair assessment of the future value. Backtesting of the model is another feature: it shows how much money you would have made in the past, following a specific trading strategy.
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All contract constraints are included in the optimisation. This includes volumetric constraints on 1 or more periods (e.g. daily, monthly and annual contract constraints). In addition, KySwing accepts contracts based on a variety of spot and forward indexed products.
KySwing is fully embedded in the KYOS Analytical Platform. With automated data feeds, up-to-date swing valuations are always available. Further integration with third party ETRM systems can be established.
KySwing is based on advanced Monte Carlo simulation techniques. Important characteristics are a mean-reverting multi-factor model with long-term, short-term and seasonal dynamics. Users can also import their own price simulations, or use those of KySim.
Optimal trading and operating decisions are calculated by applying Least Squares Monte Carlo techniques. The volatility term structure and other simulation inputs are easily derived from historical data with the accompanying calibration tool. Implied option volatilities may be used as well, by overwriting the historical volatility estimates.
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