Abstract: 

We describe how certain quantitative frameworks developed by derivatives traders in the oil market could be applied in the power markets. First, we propose a stylized model of the squeeze, where a commodity price is viewed as a financial derivative of stochastic storage with two boundary conditions set by zero storage and by zero storage capacity. We then present a novel quadratic normal option pricing model, which captures increasing volatility implicitly caused by these two boundaries. Finally, we show how this model can be applied to pricing options on virtual storage and on other commodity spreads which mimic the behavior of real assets.    

Bio:

Dr. Ilia Bouchouev is the former President of Koch Global Partners where he launched and managed global derivatives trading business for over 20 years. Over the years, he introduced several energy derivatives products and was recognized as one of the pioneers in energy options trading. He is currently a managing partner at Pentathlon Investments and an adjunct professor at New York University, where he teaches energy trading at The Courant Institute of Mathematical Sciences. He is also a senior research fellow with The Oxford Institute for Energy Studies. 

Ilia Bouchouev published many articles in top academic journals on energy markets and derivatives modelling. He is frequently quoted by Wall Street Journal, Financial Times, Bloomberg, many other news providers, and on social media. 

He is the author of the book “Virtual Barrels” on quantitative oil trading, which was named among top 10 quantitative books of the year (2023):

https://www.amazon.com/Virtual-Barrels-Quantitative-Springer-Economics/dp/3031361504