Screen-print style poster of two price curves crossing over an LNG cargo

CASE STUDIES / INDEXATION · JUL 2​025

The index choice is worth $0.52/MMBtu.

A buyer who can settle each cargo on the cheaper of two pricing formulas holds a real option. At the forward curve it looks worthless. Under simulation it is anything but.

$0.52/MMBtu

MEAN VALUE OF THE PER-CARGO INDEX CHOICE VS A BRENT-LOCKED BOOK · $0.42 VS HH

View as slides (PDF) →

Three books, one difference.

01 · THE SETUP

Twelve monthly US FOB cargoes feed a TTF-indexed German demand leg on one 174k vessel. Two benchmark books are locked to a single index; the third may choose per cargo. The formulas are deliberately calibrated so both benchmarks earn the same at forwards: the option starts almost exactly at the money.

1

Benchmark · Brent-locked

All twelve monthly US FOB cargoes priced on the Brent formula, feeding the TTF-indexed German demand leg.

2

Benchmark · HH-locked

The identical book, every cargo priced on the Henry Hub formula instead.

3

The flex book · buyer chooses

Same cargoes, same windows; for each cargo the buyer settles on whichever formula is cheaper that month.

FORWARD CURVES OF 9 JULY 2​025 · DEMAND LEG TTF IN ALL BOOKS · 12 X 3.65M MMBTU · 1 X 174K VESSEL

At the curve, the option looks worthless.

02 · AT THE CURVE

Valued against today's forwards, the free choice adds roughly $361k on a $28.8M book: one cent per MMBtu. A forward-curve valuation would conclude the clause is not worth negotiating. That conclusion is what the rest of the study dismantles.

$0M$10M$20M$30M$28.8MBRENT-LOCKED$28.8MHH-LOCKED$29.1MFREE TO CHOOSEAT THE FORWARD CURVES OF 9 JULY 2​025 · INTRINSIC OPTION VALUE ≈ $361K
EXACT ENGINE RESULTS: $28.8M / $28.8M / $29.1M ($0.66 / $0.66 / $0.67 PER MMBTU) · INTRINSIC VALUE ≈ $361K

Where the choice switches on.

03 · THE ZONES

Scaling HH and Brent independently between -50% and +50% of the forwards maps the option's activation zones. Against the Brent-locked book the choice pays when HH gets cheap; against the HH-locked book, when Brent does. In the zero-value regions the locked book already holds the optimal index, which is why the option never costs anything.

BRENT-LOCKED-50%BASE+50%HH+50%BASE-50%BRENTHH-LOCKED-50%BASE+50%HHFREE TO CHOOSE-50%BASE+50%HHONE-DIMENSIONAL · EACH BOOK SEES ONLY ITS OWN INDEXBI-DIMENSIONAL · THE BEST OF BOTHLOSS$0PROFIT · PER-MMBTU SCALE QUALITATIVE
PROFIT PER MMBTU ACROSS THE SAME SWEEP · LOCKED BOOKS SEE ONE AXIS, THE FLEX BOOK TAKES THE BEST OF BOTH · CELL COLOURS QUALITATIVE
VS THE BRENT-LOCKED BOOK-50%BASE+50%HH+50%BASE-50%BRENTVS THE HH-LOCKED BOOK-50%BASE+50%HH+50%BASE-50%BRENTCHEAP HH ACTIVATES THE CHOICECHEAP BRENT ACTIVATES IT HERE$0 · LOCKED BOOK ALREADY OPTIMAL≈$3.50UP TO ≈$7/MMBTU
DETERMINISTIC SWEEP, BOTH INDICES -50% TO +50% · CELL COLOURS QUALITATIVE, ANCHORS FROM THE ENGINE SURFACES (UP TO ≈$7/MMBTU)

Simulation moves the whole book right.

04 · THE SIMULATION

Over 1,000 simulated price paths, re-optimised path by path, the flex book averages $53.51M against $30.82M for the Brent book and $35.11M for HH. The two benchmarks differ because the indices have different volatility profiles; the flex book beats both by selectively capturing whichever moves favourably.

$-100M$0M$100M$200MMEAN · BRENT BOOK $30.82MMEAN · HH BOOK $35.11MMEAN · FREE CHOICE $53.51M1,000 MC PATHS, RE-OPTIMISED PER PATH · SHAPES ILLUSTRATIVE, MEANS EXACT
EXACT MC MEANS: $30.82M / $35.11M / $53.51M · MEDIANS $28.13M / $34.80M / $51.98M · AT FORWARD $28.80M / $28.80M / $29.16M

The option, priced path by path.

05 · THE PRICE

Per path, the difference between the flex book and each benchmark IS the option value: a mean of $0.52/MMBtu against the Brent book, $0.42 against HH. Both distributions are right-skewed with tails to about $2, and neither has meaningful downside: the choice can be ignored, never regretted.

$0.00$0.50$1.00$1.50$2.00VS BRENT · MEAN $0.52, MEDIAN $0.44VS HH · MEAN $0.42, MEDIAN $0.34RIGHT-SKEWED · TAILS TO ≈$2VALUE OF THE INDEX CHOICE PER PATH · $/MMBTU · CURVE SHAPES ILLUSTRATIVE, ANCHORS EXACT
EXACT ANCHORS: MEAN $0.52 / MEDIAN $0.44 VS BRENT · MEAN $0.42 / MEDIAN $0.34 VS HH · 1,000 PATHS, PER-PATH RE-OPTIMISATION

06 · THE VERDICT

Forwards price the index choice at one cent per MMBtu:
simulation prices it at fifty-two.

Extrinsic value lives exactly where forward-curve valuations cannot see. Whoever prices indexation clauses by simulation knows what to pay for them, and what to charge.

What the index choice is really worth.

07 · TAKEAWAYS

✓

Calibrated at the money, still worth $0.52

The two formulas were tuned to earn the same at forwards, so the intrinsic value is a rounding error of $361k. Everything the simulation finds, $0.52/MMBtu versus the Brent book and $0.42 versus HH, is pure extrinsic value.

✓

The choice pays against both benchmarks

The flex book averages $53.51M across 1,000 paths against $30.82M for the Brent book and $35.11M for HH. The value is higher against Brent because cheap-HH conditions occur more often in the simulations.

!

The upside is asymmetric, the downside is not there

Both flex-value distributions are right-skewed with tails to about $2/MMBtu and no meaningful downside: the option can be ignored, never regretted. Illustrative calibration; real formulas shift the split.

Modelled with X-LNG.

08 · THE TOOL

1

Your world goes in

Contracts, vessels, charter rates, prices, spot assumptions and constraints. The full book, not a slice.

2

One optimal plan comes out

Feasible, P&L-maximising and constraint-compliant, re-solved for every scenario in minutes.

3

Every number checks out

Each result can be recalculated by hand. Transparency your risk committee can audit.

CLOUD-BASED, ANY PORTFOLIO SIZE · BUILT AND ADVANCED DAILY BY ~25 MATHEMATICIANS, PHYSICISTS AND COMPUTER SCIENTISTS