Discover how auction models reveal the strategic value of long-term forward contracts.
In Estimating the Strategic Value of Long-Term Forward Purchase Contracts Using Auction Models, the book explains how forward contracts can change a firm's capital decisions. It presents a model to quantify the portion of project value secured by long-term agreements and compares forward contracting with selling on the spot market. The discussion centers on markets that are not perfectly competitive and on how capacity decisions and contract design interact to affect outcomes.
The text uses practical examples from energy markets, including take-or-pay contracts for natural gas, to show how key factors shape value. It highlights the role of upfront fixed costs, the number of potential buyers, and the range of buyers’ reservation values in determining when forward contracts are worth the commitment. The approach blends theory with a clear numerical framework to help assess strategic value for real projects.
- How auction models translate forward contracts into measurable value for a project
- How the number of buyers and their price reservations influence bargaining power
- How fixed and operating costs affect the decision to install capacity vs. wait for spot sales
- How to apply the method to take-or-pay contracts and other long-term agreements
Ideal for readers interested in energy markets, project finance, and contract design who want to evaluate when long-term contracts improve a capital investment’s prospects.