Quantitative and Computational Finance Seminar - Real option approach to generation assets valuation and risk assessment

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We start with Tractebel North America (TNA) generation assets portfolio and stress the need for a unified methodology for both base load and peaking power plants. The real option approach incorporates the flexibility and rigidity in power plant operation, provides us a realistic valuation framework to mark-to-market the TNA merchant power plants. The mark-to-market value of a gas-fired merchant power plant depends on the
co-movement of power and gas prices. The covariance of the power and gas forward curves can be decomposed into factors. The Heather-Jarrow-Morton curve movement methodology is based on the most important "principal"
factors. We employed Monte-Carlo simulation to generate statistical plausible scenarios of power and gas curves to re-evaluate the asset. From the value distribution we derive the asset Value at Risk. Back testing results validate our approach.

Dr. Lu will also be meeting with QCF students from 1:30pm to 2:30pm in the QCF Lab in the French Building. Interested students are welcome to attend.

Speaker Bio:

Dr. Lu joined the Risk Management organization in Tractebel North America, Inc. (TNA) in January 2002 as Vice President, Research and Analysis. In this leadership position, Lu has the responsibility for value maximization of TNA merchant power and gas assets through leading edge quantitative modeling and decision support in market and project analysis; support of
trading / origination around assets through accurate pricing and innovative structures; creation of the state-of-the-art financial models to quantify both value and risk.

Dr. Lu joins TNA from Enron Research, where he led the Valuation and Trading Analytics group as Director. Dr. Lu's primary responsibilities included options pricing, real assets valuation, and potential credit exposure and risk management strategy. He also led in the development of Real Options approaches to energy assets and the development of trading
valuation system. Prior to Enron, he was the lead quantitative analyst for TXU Energy Services as Options Specialist.

Dr. Lu earned a Ph.D. degree in physics from Drexel University. He conducted his postdoctoral research in Princeton University and University of Oregon and published papers in physics and derivatives pricing.


  • Workflow Status: Published
  • Created By: Barbara Christopher
  • Created: 10/08/2010
  • Modified By: Fletcher Moore
  • Modified: 10/07/2016


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