Energy Trading and Risk Management: A Practical Approach to Hedging, Trading and Portfolio Diversification (Wiley Finance)
Iris Marie Mack
Format: PDF / Kindle (mobi) / ePub
Energy Trading and Risk Management provides a comprehensive overview of global energy markets from one of the foremost authorities on energy derivatives and quantitative finance. With an approachable writing style, Iris Mack breaks down the three primary applications for energy derivatives markets – Risk Management, Speculation, and Investment Portfolio Diversification – in a way that hedge fund traders, consultants, and energy market participants can apply in their day to day trading activities.
Moving from the fundamentals of energy markets through simple and complex derivatives trading, hedging strategies, and industry-specific case studies, Dr. Mack walks readers through energy trading and risk management concepts at an instructive pace, supporting her explanations with real-world examples, illustrations, charts, and precise definitions of important and often-misunderstood terms.
From stochastic pricing models for exotic derivatives, to modern portfolio theory (MPT), energy portfolio management (EPM), to case studies dealing specifically with risk management challenges unique to wind and hydro-electric power, the bookguides readers through the complex world of energy trading and risk management to help investors, executives, and energy professionals ensure profitability and optimal risk mitigation in every market climate.
barrier. A barrier option is also path-dependent. Its value changes if the underlying asset reaches or surpasses a specified price. The option’s value at expiration depends upon both the value of the underlying asset at expiration and on whether past values of the underlying asset has hit a barrier. Barrier options have the following two features—as detailed in Table 4.1: 1. Knockout—a feature that causes the option to immediately terminate if the underlying asset reaches a certain barrier
Management Construction costs Production costs ■■ Regulations ■■ ■■ Example: An electric utility may have the option to switch between various fuel sources to generate power. Hence a flexible plant, although more expensive may actually be more valuable. This is an example of an input mix real option. Example: The opportunity to ■■ ■■ Invest in the expansion of a power plant is a real call option. Sell the plant is a real put option. Power utilities can implement a discounted cash flow (DCF)
changes for a price movement, that is, by reducing the rate of change of gamma—to be discussed in the next section. In addition, further discussion of delta hedging and its applications to energy markets may be found in Chapter 9. 5.6 Gamma Hedging As previously defined in Table 5.4, gamma measures the rate of change (curvature) in the delta with respect to changes in the price of the underlying asset. Gamma for a call option is illustrated in Figure 5.6. It can be described 117 Risk
sources all across the globe. In this section we discuss the following hot topics in the energy markets: ■■ ■■ Discovery of new oil shale sources Advances in fracking technology xv Preface ■■ ■■ Liquefied natural gas (LNG) exports Oil boom shifting global energy geopolitics 0.2.1 Shale Natural gas and crude oil are important primary fossil fuels. The common use of petroleum is often restricted to the liquid oil form, that is, crude oil. Crude oil is a complex mixture of hydrocarbons
as a fed call or maintenance call. Mark-toMarket To debit or credit on a daily basis a margin account based on the close of that day’s trading session. In this way, buyers and sellers are protected against the possibility of contract default. Open Interest Total number of futures contracts long or short in a delivery month or market that has been entered into and not yet offset or fulfilled by delivery. Each open transaction has a buyer and a seller, but for calculation of open interest, only