Robust valuation and hedging of tolling agreements and physical assets

Krzysztof Wolyniec shows how very robust valuation bounds of tolling agreements can be obtained without modelling the dispatch process or the underlying price process. This flexible method, which uses martingale duality, provides a reliable valuation output and its application is time-efficient

This paper considers a simplified version of a natural gas power plant

The problem of valuation and risk management of tolling agreements or complicated physical contracts/assets within a trading environment has received a substantial amount of interest in both the academic and practitioner literature (see Eydeland & Wolyniec (2014)).

The significant complexity of the associated payoff function with the many path-wise dependencies and non-convexities (such as lump costs) have led to a variety of solutions, approaches and heuristics. There is clearly a need to cut