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    The liquefied natural gas spot market and valuation of the rerouting option

    Geman, Helyette and Philippou, Sofia (2020) The liquefied natural gas spot market and valuation of the rerouting option. Journal of Energy Markets 13 (3), pp. 97-113. ISSN 1756-3607.

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    Abstract

    The LNG market has experienced remarkable changes in the last few years, with long-term contracts being replaced by short-term ones and optionalities granted by suppliers in a context of a large increase of natural gas production. Flexible LNG contracts give buyers the option to re-direct a given cargo if they identify a higher spot price at a point different from the original destination. The goal of this paper is twofold: i) describe the new outlook of LNG markets, which has become more and more spot-centric, with Asian LNG Futures bringing transparency to spot and forward prices; ii) address the valuation of the re-routing option, a number that must be accounted for by the buyer when assessing the profitability of a given cargo. As an example, we apply the re-routing option valuation methodology to the scenario where the supplier is the US, the original destination is Germany and the alternative destination is Japan; we assume the re-routing of the vessel takes place when the cargo reaches the waters of Germany. This approach can be used for any group of three countries by adjusting the transportation costs. Our paper also depicts the value of the option as a function of the volatility of the natural gas spot prices in the alternative destination.

    Metadata

    Item Type: Article
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Commodities Finance Centre
    Depositing User: Sofia Philippou
    Date Deposited: 23 Nov 2020 11:08
    Last Modified: 23 Nov 2020 16:22
    URI: https://eprints.bbk.ac.uk/id/eprint/41433

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