Professor Petter Bjerksund and Professor Emeritus Gunnar Stensland at the Department of Business and Management Science have developed three option pricing formulas that are used all over the world.

Secondly, they have developed models for valuation and management of electricity price risk in the Nordic market.

First, in 1993

Their option-pricing formulas are implemented in many different software packages and are used extensively every day for valuation and risk management. The typical users are traders, banks, regulators and auditors, as well as firms to evaluate employee options/warrants.

Bjerksund and Stensland first proposed the method in 1993, and then modified by the authors in 2002. 

The Bjerksund-Stensland model is able to complete complex calculations more quickly and efficiently compared to many other pricing methods. This was, according to Investipedia, especially important because computers at the time of its inception were less powerful, and inefficient formulas could slow down calculations. Firms that report option value for an IPO or just as part of their balance sheet need to reveal the method used.

Thousands of alternative packages

There exists thousands of alternative software packages. Some of these are huge and expensive, and some smaller are free on the internet. The Bjerksund and Stensland models are included in most of them (MATLAB & Simulink – MathWorks, www.mathworks.cn).

For American options, the choice is very often the Bjerksund and Stensland model. Every day several thousands of these options are evaluated around the world and their model are adapted to American options, which can be exercised at any time during the duration of the contract. 

References

• Bjerksund, Petter; Stensland, Gunnar. Closed-Form Approximation of American Options (Scandinavian Journal of Management, 9, 1993)
• Bjerksund, Petter; Stensland, Gunnar. American Exchange Options and a Put-Call Transformation: A Note (Journal of Business Finance & Accounting 1993, Volum 20)
• Bjerksund, Petter; Stensland, Gunnar. Utledning av rentens terminstruktur ved "maksimum glatthets"-prinsippet (Beta. Scandinavian Journal of Business Research 1996, Volum 10)
• Bjerksund, Petter; Stensland, Gunnar. Closed-Form Valuation of American Options (Working paper NHH, 2002)
• Bjerksund, Petter; Myksvoll, Bjarte; Stensland, Gunnar. Exercising flexible load contracts: Two simple strategies. Applied Stochastic Models (Business and Industry 2008; Volum 24)
• Bjerksund, Petter; Rasmussen, Heine; Stensland, Gunnar. Valuation and Risk Management in the Norwegian Electricity Market (Energy Systems, 2010)
• Bjerksund, Petter; Stensland, Gunnar; Vagstad, Frank. Gas Storage Valuation: Price Modelling v. Optimization Methods (Energy Journal 2011, Volum 32)
• Bjerksund, Petter; Stensland, Gunnar. Closed form spread option valuation (Quantitative finance (Print) 2014, Volum 14)

On the other hand, the Black-Scholes is a model for European options, which can only be exercised on the expiration date. The difference between American and European options is highly important for how to estimate buying or selling. It relates to when the options can be exercised. While European options may be exercised only at the expiration date of the option, an American option may be exercised at any time before the expiration date.

This makes it riskier for a seller of an American option, due to the uncertainty during the contract. The Bjerksund-Stensland Model helps to price American options because it considers the uncertainty.

Electricity price risk

Petter Bjerksund and Gunnar Stensland have developed models for valuation and management of electricity price risk in the Nordic market.

The results are implemented in computer software ETRM (Energy Trade Risk Management) used by the industry and was disseminated through the NHH part-time executive programme Kraftanalytikerstudiet.

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