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The Value of Commodity Purchase Contracts With Limited Price Risk

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  • Elizabeth Olmsted Teisberg
  • Thomas J. Teisberg

Abstract

This paper describes and demonstrates the equilibrium market valuation of commodity purchase contracts with price ceilings or price floors or both. These contracts, which we call "limited price risk" contracts, are significantly easier for buyers and sellers to agree upon than fixed price contracts when price uncertainty is high and buyers and sellers have inconsistent price expectations. Analysis of an actual natural gas contract as well as the existence of many brokers promoting limited price risk gas contracts, suggest that these contracts may be priced inefficiently in practice. Our example application should help managers to make use of modem financial techniques in assessing the value of these types of contracts.

Suggested Citation

  • Elizabeth Olmsted Teisberg & Thomas J. Teisberg, 1991. "The Value of Commodity Purchase Contracts With Limited Price Risk," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 109-136.
    • Handle: RePEc:aen:journl:1991v12-03-a08
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    JEL classification:

    • F0 - International Economics - - General

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