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

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