Pricing the (European) option to switch between two energy sources An application to crude oil and natural gas》.pdf

Energy Policy 87 (2015) 270–283 Contents lists available at ScienceDirect Energy Policy journal homepage: /locate/enpol Pricing the (European) option to switch between two energy sources: An application to crude oil and natural gas Hayette Gatfaoui n IÉSEG School of Management; Finance, Audit Control Department, Socle de la Grande Arche, 1 Parvis de la Défense, 92044 Paris La Défense Cedex, France H I G H L I G H T S We consider a firm, which chooses either crude oil or natural gas as an energy source. The capability to switch offers the firm a hedge against energy commodity price risk. A European put option prices the ability to switch from crude oil to natural gas. The capability to switch between two energy sources reduces the firms energy costs. The discount illustrates the efficiency of the energy management policy (e.g. timing). a r t i c l e i n f o a b s t r a c t Article history: We consider a firm, which can choose between crude oil and natural gas to run its business. The firm Received 20 March 2015 selects the energy source, which minimizes its energy or production costs at a given time horizon. As- Received in revised form suming the energy strategy to be established over a fixed time window, the energy choice decision will 31 August 2015 be made at a given future date T. In this light, the firms energy cost can be considered as a long position Accepted 8 September 2015 in a risk-free bond by an amount of the terminal oil price, and a short positio