SOS is a two-factor tree model as described in the
White Paper
(the two-factor stochastic differential equation found in the footer on this website is
the actual equation that governs forward price movements in SOS). This model possesses the
two features discussed on the Storage Model page that any good storage model must have in
order to be accurate and to give a vast array of trading metrics. Here’s how SOS tackles
those features.
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A dynamic tree approach is used in SOS, which is the most accurate methodology for
capturing the complicated, follow-on American optionality in storage
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Two factors of price-movement to which the tree methodology is applied are utilized,
and they cause parallel shifts and front-end twists to modeled forward curves, which
captures approximately 95% of how US natural gas forward curves move.
This second (front-end twist) factor of price movement also creates cash price movements
in SOS that give believable estimates of extrinsic: The other models on the market create
cash price movements that tend to overestimate extrinsic.
Adding the second factor is crucial since storage value is all about spreads, but it does not add much to our run-times:
SOS typically takes less than 10 minutes to run per year of storage lease. SOS can also handle the following operational
constraints:
Different commodity and fuel charges over different months Ratchets based on both inventory level and month of the year Minimum requirements (a minimum inventory must be maintained over certain periods) Ad valorem taxes Transport to/from the facility is needed Bid/Offer spreads
The model also allows you to propose and assess a different set of dynamic hedges for its effectiveness in protecting
extrinsic value.
No other storage model on the market does all this!
User Manual
White Paper
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Model Details 