EXPRESS: On the Valuation and Monetization Roles of the Rolling Intrinsic Policy for Merchant Commodity Storage

Abstract

Merchants use the rolling intrinsic policy to value commodity storage assets and monetize the values they attribute to these assets. A recent study ascribes to informational inconsistency two discrepancies between its partial monetization findings and the known excellent valuation performance of this method: (i) The rolling intrinsic policy can perform worse than the intrinsic policy and (ii) it appears to be far from optimal. This paper contends that this claim generally confounds informational inconsistency and the risk adjustment that underpins the common no arbitrage valuation of this policy. In particular, lack of risk adjustment in that investigation explains at least the first difference and informational inconsistency cannot be associated with the second dissimilarity in about four percent of its instances. Further, this work establishes that equipping the rolling intrinsic policy with forward trading rules out the former disparity, whereas the latter one in general can persist. Finally, it uses known results to argue that in realistic settings this extended policy incurs small monetization losses on average for storage assets acquired at a fair price and outlines alternative monetization methods with potentially improved effectiveness.