A Capacitated Commodity Trading Model with Market Power

Victor Martínez- de-Albéniz and Josep Maria Vendrell Simón

Chapter 2 in Real Options in Energy and Commodity Markets, 2017, pp 31-60 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In commodity markets, physical traders can take advantage of geographical price spreads by buying a commodity at the location where the price is low and reselling it where it is high. These trading decisions may have an impact on future prices, which we refer to as market power. They are also subject to operational capacity constraints. Our objective in this chapter is to understand how to best utilize this capacitated locational spread option in the presence of market power. We model the trader’s market power by altering the drifts of the underlying price stochastic processes. We find that the optimal policy is similar to the classical case without market power: there are two thresholds that determine three regions where it is optimal to: (1) move as much as possible from one market to the other; (2) do the the same in the opposite direction; or (3) do nothing. The values of the thresholds depend on operational costs, as usual, but also on market power and price uncertainty. We characterize these thresholds both in isolation and in a competitive equilibrium.

Keywords: Energy and Commodity Markets; Real Options; Commodity Storage and Shipping; Emission Markets; Mining Operations; Hydrocarbon Cracking Operations; Gasoline Portfolio Optimization; Market Equilibrium; Market Impact; Risk-Neutral Valuation; Financial Hedging; Stochastic Optimization; Monte Carlo Simulation (search for similar items in EconPapers)
JEL-codes: Q02 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789813149410_0002 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789813149410_0002 (text/html)
Ebook Access is available upon purchase.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:wschap:9789813149410_0002

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().