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Exercising flexible load contracts: Two simple strategies
Author(s) -
Bjerksund Petter,
Myksvoll Bjarte,
Stensland Gunnar
Publication year - 2007
Publication title -
applied stochastic models in business and industry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.413
H-Index - 40
eISSN - 1526-4025
pISSN - 1524-1904
DOI - 10.1002/asmb.697
Subject(s) - simple (philosophy) , swing , computer science , dynamic programming , electricity , forward market , sense (electronics) , operations research , microeconomics , mathematical optimization , operations management , economics , mathematics , finance , algorithm , engineering , electrical engineering , futures contract , mechanical engineering , philosophy , epistemology
A flexible load contract is a type of swing option where the holder has the right to receive a given quantity of electricity within a specified period, at a fixed maximum effect (delivery rate). The contract is flexible, in the sense that delivery (the take hours) is called one day in advance. We investigate two simple strategies for exercising flexible load contracts, where both use price information from the forward market. For 10 contracts traded in the period 1997–2001, we calculate the performance of the two strategies and compare with the reported performance of one complex dynamic programming approach as well as the actual results obtained by three anonymous market participants. The comparison indicates that our simple computer‐efficient strategies perform better on average and produce more stable results. Copyright © 2007 John Wiley & Sons, Ltd.