Patent ID: 7634441

Claim:
A method for calculating a fair market value, at time t 0 , of a locational derivative contract settled at time t T , in a market related to a commodity delivered over a network of one or more congestible lines, the market including at least one traded instrument and future shadow prices which depend on congestion in the one or more congestible lines, the method comprising the steps of: identifying a fair market value equation for determining the fair market value of the locational derivative contract, wherein the fair market value is based, at least in part, on the future shadow prices, a payoff of the locational derivative contract at time t T and a portfolio, y, in the at least one traded instrument; a computer system calculating a partial derivative of the fair market value equation with respect to the future shadow prices to obtain a calculated partial derivative; a computer system solving the calculated partial derivative, for the portfolio y, to minimize any congestion risk associated with the locational derivative contract; and a computer system generating an indication of the fair market value of the locational derivative contract according to (−y′)(F), where F represents the corresponding price of the at least one traded instrument, wherein y′ denotes a transpose of y.