Breaking down the model
Brett Humphreys and Andy Dunn outline a method to help energy companies minimise potential model risk and thereby avoid costly errors in valuing deals.
The energy sector faces some of the most complex contract valuations in financial markets, from natural gas storage deals to daily power price options to seasonal prices and seasonal volatilities. Companies must often make a decision between buying an ‘off-the-shelf’ model not designed specifically for a given contract or developing their own internal models. Either choice exposes a firm to model risk – the risk that there is a fundamental flaw in the construction or implementation of a
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