Analysis and Enhancement of Practice-based Policies for the Real Option Management of Commodity Storage Assets

The real option management of commodity storage assets is an important practical problem. Practitioners heuristically solve the resulting stochastic optimization model using the rolling intrinsic (RI) and rolling basket of spread options (RSO) policies. Combined with Monte Carlo simulation, these policies typically yield near optimal lower bound estimates on the value of storage. This paper provides novel structural and numerical support for the use of the RI and RSO policies, and enhances them by developing a simple, fast to estimate, and effective dual upper bound tailored for these policies. Moreover, this work emphasizes the superiority of the RI policy over the RSO policy and proposes a variant of the RSO policy that, on the considered instances, slightly improves on the average performance of the RSO policy but yields a more substantial improvement when the suboptimality of this policy is more pronounced.