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Quantitative Finance · Glossary

What is Extrinsic value, rolling intrinsic?

Also known as: extrinsic value · rolling intrinsic

Definition 16.7 Rates, Credit, XVA and Risk · Chapter 16 — Commodity and Energy Derivatives

The extrinsic value of a facility is its value above the intrinsic, from the right to change the schedule as prices move. The rolling intrinsic strategy captures part of it: re-optimise the schedule on each new forward curve and re-hedge the difference, never losing the intrinsic already locked in.

The illustrative forward curve (left axis) and the intrinsic plan’s inventory at the end of each month (right axis): fill in the cheap summer months, empty in the dear winter ones. Data: the chapter’s tutorial.
Figure 16.3. The illustrative forward curve (left axis) and the intrinsic plan’s inventory at the end of each month (right axis): fill in the cheap summer months, empty in the dear winter ones. Data: the chapter’s tutorial.

Examples

Example 16.9 (A season of storage)

A facility of 1 million MMBtu (ten units) starts and ends the April–March year empty; it can inject two units a month and withdraw four, at 2 cents per MMBtu each way. On the curve of Example 16.2 the intrinsic plan injects two units a month from April to August and withdraws in December, January and February (Figure 16.3); its value is USD 634 447. Rolling intrinsic on 4 000 simulated curves is worth USD 699 550, least-squares Monte Carlo USD 698 182: an extrinsic value of about 10% of the intrinsic at a monthly decision frequency. Daily decisions, which a fast facility can take, add more.

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