The V AMMCS International Conference

Waterloo, Ontario, Canada | August 18-23, 2019

AMMCS 2019 Plenary Talk

Real Options and Differential Games in Commodity Finance

Matt Davison (Western University)

Process Industries such as Mining, Energy, and Commodity Processing are the historical foundation of the Canadian economy. These industries typically utilize long-lived, expensive and large pieces of infrastructure. The profitability of projects in these industries depends on prices set on world commodity markets, but project operators often have considerable optionality in deciding when to open, close, run, or idle facilities. The question is, how to optimally utilize this operational flexibility and how to value projects in the face of it. The resulting problems are mathematically quite similar to American Options problems from traditional Quantitative Finance, but often involve more complicated modelling around cost structures to idle a run plant or to restart an idled plant. In addition, particularly in rather local energy markets, the impact of idling a plant can significantly impact market prices, leading to interesting multi-player dynamic, or differential, games.

This talk will focus on the mathematical, economic, and financial insights my co-workers and I have found over nearly 20 years of working in this area, in areas including hydroelectric power, to natural gas storage, to corn ethanol production, to shipping of oil and liquefied natural gas.
Matt Davison earned his PhD in Applied Mathematics from Western University in 1995, and worked at the University of Bern and at Deutsche Bank before returning to Western as a faculty member in 1999. Matt has written numerous papers in the area of financial mathematics, industrial mathematics, and energy real options. Matt is exceptionally proud of the more than 20 PhD students and more than 50 Master’s students he has mentored who now hold roles in Banking, Industry, and Academia. Matt held the Canada Research Chair in Quantitative Finance between 2006 and 2016 and is a Fellow of the Fields Institute for Research in the Mathematical Sciences. After holding a number of leadership roles at Western, Matt has been Dean of Science at Western since July 2018.