Analysis and Enhancement of Practice-based Policies for the Real
Option Management of Commodity Storage Assets
March 19, 2014
3:00pm PGH 646
Abstract
The real option management of commodity storage assets is an important
practical problem. Practitioners heuristically solve the resulting
stochastic optimization model using the rolling intrinsic (RI) and rolling
basket of spread options (RSO) policies. Combined with Monte Carlo
simulation, these policies typically yield near optimal lower bound
estimates on the value of storage. This paper provides novel structural and
numerical support for the use of the RI and RSO policies, and enhances them
by developing a simple and effective dual upper bound to be used in
conjunction with these policies. Moreover, this work emphasizes the
superiority of the RI policy over the RSO policy and proposes a variant of
the RSO policy that, on the considered instances, slightly improves on the
average performance of the RSO policy but yields a more substantial
improvement when the suboptimality of this policy is more pronounced.