Hello,
I am turning to this forum for an insight into a real world dilemma. The company I work for is preparing a bid to buy electricity from another company (it issued a tender to sell electricity). We need to deliver our bid to the other company on date T with specified price P. The counterparty has than the option to accept bids or not to accept it - it has to take the decision in N days. It is clear that the countepraty is long an option that needs to be priced, and that this option price should be incorporated in our bid price for electricity (e.g., if market price for electricity is 30, and option price is 1, than our bid price would be 29). Now the question is: what type of option does the counteparty have - is it a call or a put?
In my option it is a call - by delivering a bid we commit to buy the electricity. If the counterparty decides not to accept bids, it means it excercies call option, and buys back the electricity it commited to sell (thereby the traded quantity is 0). Does this make any sense?
Many thanks for any insights!