Framing a Transfer Option on UK–France Oil Price Spreads
Summary
The document frames an annual right to transfer oil from France to the UK, with daily capacity and the choice to leave capacity unused. Its proposed payoff arises when the UK price exceeds the French price: buy in France and sell in the UK. The underlying data consist of quarterly delivery price series for both locations, and the question considers modeling their spread rather than each price level separately.
The author observes that the available history is limited and questions whether seasonal decomposition is justified. A simple average of selected quoted quarterly price differences is offered as an intuition for value, but it does not account for daily spread variation, the option to exercise selectively, or uncertainty over the delivery year. No pricing model or empirical validation is provided. A rigorous valuation would need to clarify capacity use, delivery and price conventions, and the distribution of the relevant spreads; the prompt leaves these issues open.
Key ideas
- The transfer right pays off when the UK price exceeds the French price, subject to the ability to choose whether to transfer.
- Modeling the UK–France spread directly is proposed as an alternative to modeling both price series separately.
- The annual right has daily capacity and may be unused when transferring is uneconomic.
- The short historical sample raises uncertainty about estimating seasonality and spread behavior.
- The stated average of quarterly price differences is only an intuition, not a complete option valuation.
Tags
Full text
# Pricing a transfer option for oil # Pricing a transfer option for oil Need some input in how to attack this problem. Given are 8 timeseries: - UK Oil price, Delivery Quarter 1 2020 - UK Oil price, Delivery Quarter 2 2020 - UK Oil price, Delivery Quarter 3 2020 - UK Oil price, Delivery Quarter 4 2020 and - FR Oil price, Delivery Quarter 1 2020 - FR Oil price, Delivery Quarter 2 2020 - FR Oil price, Delivery Quarter 3 2020 - FR Oil price, Delivery Quarter 4 2020 The prices plotted (UK=BQ) UK and FR Prices These prices are given for 390 days, starting in september 2017. The question now is how to price the right to transfer oil from UK to FR. For the year 2020. Context: If UK price is above FR price, assume we can buy at the spot in FR and sell at the UK spot. If we have this transfer right. The transfer right is bought for a full year and you pay whether you use it or not. You buy a daily transfercapacity and you can choose to not use it (if UK is cheaper than FR for example). As of now the UK price is 12 cent above US in the quarter one future. 22 cent in quarter 2 -12 cent in quarter 3 16 cent in quarter 4 So this option is intuitively already worth (12+22+16)/4=12.5 cent. Transfer is only one way. Delivery is done from the first day of the quarter to the last (Q1 starts Jan 1). I plotted the UK-FR spreads: Now my question is whether there is a good way to attack this problem. I think that it is smarter to model the UK-FR difference than the underlying timeseries itself. Is that correct? Also when it comes to modeling this, my intuition says 390 days is not a lot. In previous problems I had multiple years of data so I could better detect seasonality and trends with a STL decomposition. Here that does not seem to make sense. Any input or ideas are welcome.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.