transport model andy ,
the scale effect in the transport model can be explained .
i use a european option to do the illustration .
i raise the underlying and strike price by the same amount , use the fuel
percentage to adjust the strike .
the net result is the intrinsic value decreases as the level goes up .
if the fuel percentage is not very high , the option premium actually
increases with the level , although the
intrinsic value decreases .
if the fuel percentage is very high ( > 8 % ) , then we see a decreasing option
price .
in the transport deal , fuel change is often below 5 % , so you will not see a
decreasing spread option price
when nymex moves up . so i think the transport model still does what it
should do .
zimin
in the following exmaple , i used r = 6 % , vol = 20 % , t = 100 days , see spreadsheet
for details .
- - - - - - - - - - - - - - - - - - - - - - forwarded by zimin lu / hou / ect on 10 / 20 / 2000 01 : 24 pm
- - - - - - - - - - - - - - - - - - - - - - - - - - -
zimin lu
10 / 20 / 2000 10 : 45 am
to : andrew h lewis / hou / ect @ ect
cc : colleen sullivan / hou / ect @ ect , stinson gibner / hou / ect @ ect
subject : level effect in transport
andy ,
the following spread sheet domenstrates the leve effect in transport
valuation .
i add an " nymex add - on " to both delivery and receipt price curve before fuel
adjustment , keep everything else the same . the transport value ( pv of the
spread options )
increases when nymex add - on increases .
i can visit you at your desk if you have further question .
zimin
transport model
andy ,
the scale effect in the transport model can be explained .
i use a european option to do the illustration .
i raise the underlying and strike price by the same amount , use the fuel
percentage to adjust the strike .
the net result is the intrinsic value decreases as the level goes up .
if the fuel percentage is not very high , the option premium actually
increases with the level , although the
intrinsic value decreases .
if the fuel percentage is very high ( > 8 % ) , then we see a decreasing option
price .
in the transport deal , fuel change is often below 5 % , so you will not see a
decreasing spread option price
when nymex moves up . so i think the transport model still does what it
should do .
zimin
in the following exmaple , i used r = 6 % , vol = 20 % , t = 100 days , see spreadsheet
for details .
- - - - - - - - - - - - - - - - - - - - - - forwarded by zimin lu / hou / ect on 10 / 20 / 2000 01 : 24 pm
- - - - - - - - - - - - - - - - - - - - - - - - - - -
zimin lu
10 / 20 / 2000 10 : 45 am
to : andrew h lewis / hou / ect @ ect
cc : colleen sullivan / hou / ect @ ect , stinson gibner / hou / ect @ ect
subject : level effect in transport
andy ,
the following spread sheet domenstrates the leve effect in transport
valuation .
i add an " nymex add - on " to both delivery and receipt price curve before fuel
adjustment , keep everything else the same . the transport value ( pv of the
spread options )
increases when nymex add - on increases .
i can visit you at your desk if you have further question .
zimin