Energy Trading and Risk Management E-Book

Iris Marie Mack

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 331

Veröffentlichungsjahr: 2014

Beschreibung

A comprehensive overview of trading and risk management in the energy markets 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. Energy Trading and Risk Management is a great resource to help grapple with the very interesting but oftentimes complex issues that arise in energy trading and risk management.

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Energy Trading and Risk Management

A Practical Approach to Hedging, Trading, and Portfolio Diversification

IRIS MACK

Cover Design: Wiley Cover Image: ©iStockphoto.com/Estate of Stephen Laurence Strathdee

Copyright © 2014 by John Wiley & Sons Singapore Pte. Ltd.

Published by John Wiley & Sons Singapore Pte. Ltd. 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628 All rights reserved.

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ISBN 978-1-118-33933-6 (Hardcover)

ISBN 978-1-118-33936-7 (ePDF)

ISBN 978-1-118-33934-3 (ePub)

In loving memory of my parents: Dorothy Mack Watson (mom) U.S. Army Veteran Willie Mack, Jr. (dad) Fred Watson Sr. (stepdad)

Contents

Preface

Acknowledgements

About the Author

About the Contributors

Chapter 1: Energy Markets Fundamentals

1.1 Physical Forward and Futures Markets

1.2 Spot Market

1.3 Intraday Market

1.4 Balancing and Reserve Market

1.5 Congestion Revenue Rights, Financial Transmission Rights, and Transmission Congestion Contracts

1.6 Chapter Wrap-Up

References

Chapter 2: Quant Models in the Energy Markets: Role and Limitations

2.1 Spot Prices

2.2 Forward Prices

2.3 Chapter Wrap-Up

References

Chapter 3: Plain Vanilla Energy Derivatives

3.1 Definition of Energy Derivatives

3.2 Global Commodity Exchanges

3.3 Energy Derivatives Pricing Models

3.4 Settlement

3.5 Energy Derivatives Quant Models: Role and Limitations

3.6 Options

3.7 Vanilla Options

3.8 European Options

3.9 American Options

3.10 Swaps

3.11 Swaps to Futures

3.12 Chapter Wrap-Up

References

Chapter 4: Exotic Energy Derivatives

4.1 Asian Options

4.2 Barrier Options

4.3 Digital Options

4.4 Real Options

4.5 Multiasset Options

4.6 Spread Options

4.7 Perpetual American Options

4.8 Compound Options

4.9 Swaptions

4.10 Swing Options

4.11 Chapter Wrap-Up

References

Chapter 5: Risk Management and Hedging Strategies

5.1 Introduction to Hedging

5.2 Price Risk

5.3 Basis Risk

5.4 The Option “Greeks”

5.5 Delta Hedging

5.6 Gamma Hedging

5.7 Vega Hedging

5.8 Cross-Hedging Greeks

5.9 Quant Models Used to Manage Energy Risk: Role And Limitations

5.10 Chapter Wrap-Up

References

Chapter 6: Illustrations of Hedging with Energy Derivatives

6.1 Hedging with Futures Contracts

6.2 Hedging with Forward Contracts

6.3 Hedging with Options

6.4 Hedging with Swaps

6.5 Hedging with Crack Spread Options

6.6 Hedging with Spark Spreads

6.7 Hedging with Other Energy Derivatives

6.8 Chapter Wrap-Up

References

Chapter 7: Speculation

7.1 Convergence of Energy and Financial Markets

7.2 Trading Terminology

7.3 Energy Products Trading Codes

7.4 Futures Trading Symbols: Month Code Abbreviation

7.5 Fundamental and Technical Analyses

7.6 Trading Tools: Charts and Quotes

7.7 Energy Trading Market Participants

7.8 Speculation in the Oil Markets

7.9 Speculation in the Electricity Markets

7.10 Speculation in the Natural Gas Markets

7.11 Chapter Wrap-Up

References

Chapter 8: Energy Portfolios

8.1 Modern Portfolio Theory

8.2 Energy Portfolio Management

8.3 Optimization of Electricity Portfolios

8.4 Optimization of Gas Portfolios

8.5 Other Energy Portfolio Management Models

8.6 Chapter Wrap-Up

References

Chapter 9: Hedging Nonlinear Payoffs Using Options: The Case of a New Subsidies Regime for Renewables

9.1 Renewable Energy, Options Pricing, and Government Subsidies

9.2 Government Subsidies as a Stochastic Process

9.3 Impact of Embedded Options and Stochastic Subsidies on Pricing and Risk Management

9.4 Chapter Wrap-Up

References

Chapter 10: Case Study: Hydro Power Generation and Behavioral Finance in the U.S. Pacific Northwest

10.1 An Overview of Behavioral Finance

10.2 Behavioral Finance in Energy Economics

10.3 Power Generation in the Pacific Northwest

10.4 Behavioral Financing of Projects in The Pacific Northwest

10.5 Northwest Power Planning

10.6 Chapter Wrap-Up

Reference

Bibliography

Index

Wiley End User License Agreement

List of Table

Chapter 1

Table 1.1

Table 1.2

Chapter 2

Table 2.1

Chapter 3

Table 3.1

Table 3.2

Table 3.3

Table 3.4

Chapter 4

Table 4.1

Table 4.2

Table 4.3

Table 4.4

Table 4.5

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Table 5.6

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Table 6.5

Table 6.6

Table 6.7

Table 6.8

Table 6.9

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Chapter 8

Table 8.1

Table 8.2

Table 8.3

Table 8.4

Chapter 9

Table 9.1

Chapter 10

Table 10.1

Table 10.2

List of Figure

Preface

Figure P.1 Shale

Figure P.2 U.S. Shale Oil Resources

Figure P.3 Fracking

Figure P.4 Liquefied Natural Gas (LNG) Production Process

Figure P.5 How Liquefied Natural Gas (LNG) Reaches Gas Customers

Figure P.6 Applications of Energy Derivatives

Chapter 1

Figure 1.1 Power and Energy

Figure 1.2 Electricity Submarkets

Figure 1.3 Forward Contract

Figure 1.4 Swaps

Figure 1.5 Role of the Independent System Operator (ISO) in the Electricity Markets

Figure 1.6 Spot Market Participants

Figure 1.7 Nonnormality of Electricity Spot Prices Graphs

Chapter 2

Figure 2.1 APX Historical Average Monthly Spot Prices

Figure 2.2 Random Variables of Stochastic Processes

Figure 2.3 Poisson Process: A Type of Stochastic Process

Figure 2.4 Drift Rate

Figure 2.5 Random Walk Example

Figure 2.6 Ornstein-Uhlenbeck Process

Figure 2.7 Futures and Forward Contracts

Figure 2.8 Forward Contract

Figure 2.9 Contango and Backwardation

Chapter 3

Figure 3.1 Derivatives Contract Closing

Figure 3.2 In-the-Money (ITM), Out-of-the-Money (OTM), and At-the-Money (ATM)

Figure 3.3 Payoff

Figure 3.4 Plain Vanilla Energy Swap

Chapter 4

Figure 4.1 Asian Call Option

Figure 4.2 Payoff Diagrams for Four Types of Barrier Options

Figure 4.3 Digital Options

Figure 4.4 Asset-or-Nothing Options

Figure 4.5 Application of Digital Options in the Energy Markets

Figure 4.6 Applications of Real Options in the Oil Industry

Figure 4.7 Cracking in Petroleum Refining

Figure 4.8 Tolling Agreement

Figure 4.9 Swaption Modeling

Figure 4.10 Swaption

Figure 4.11 Swing Options

Chapter 5

Figure 5.1 Detailed Breakdown of Risks Incurred by Energy Market Participants

Figure 5.2 Marketer’s Risks

Figure 5.3 Spot Price Doesn’t Equal Futures Contract Price

Figure 5.4 Delta for a Call Option

Figure 5.5 Delta Range for Call and Put Options

Figure 5.6 Gamma Hedging

Figure 5.7 Vega Hedging

Figure 5.8 Monte Carlo Simulation

Chapter 6

Figure 6.1 Generators Use Futures Contracts to Hedge

Figure 6.2 Generator’s Physical Position

Figure 6.3 Generator’s Financial Position of Sold Futures Contracts

Figure 6.4 Generator’s Hedged Position

Figure 6.5 End Users Utilize Futures Contracts to Hedge

Figure 6.6 End User’s Physical Position

Figure 6.7 End User’s Financial Position

Figure 6.8 End User’s Hedged Position

Figure 6.9 Marketer’s Long Hedge

Figure 6.10 Marketer’s Short Hedge

Figure 6.11 Spot Price Doesn’t Equal Futures Contract Price

Figure 6.12 Forward Hedge

Figure 6.13 Hedging in a “Closed” System

Figure 6.14 Fuel Swap

Figure 6.15 California-Oregon Border (COB)

Figure 6.16 Natural Gas Basis Swap

Chapter 7

Figure 7.1 Convergence of Energy and Financial Markets

Figure 7.2 Generator’s Speculative Positions

Figure 7.3 Technical Analysis Sample

Figure 7.4 Bar Chart

Figure 7.5 Natural Gas Price Bar Chart

Figure 7.6 Natural Gas April 2013 (NGJ13.NYM)-NY Mercantile

Figure 7.7 U.S Electric Transmission Grid

Figure 7.8 U.S. Natural Gas Pipeline Network

Figure 7.9 An Intricate Web of Interstate and Intrastate Gas Pipelines in the United States

Figure 7.10 Energy Trading Market Participants

Figure 7.11 World Crude Oil Reserves

Figure 7.12 Natural Gas Hubs in the United States

Chapter 8

Figure 8.1 Energy Portfolio

Figure 8.2 Efficient Frontier

Figure 8.3 Portfolio Diversification for an Electric Power Generator

Figure 8.4 Gas-Fired Power Plants

Figure 8.5 Economic Load Dispatch of a Portfolio of Gas-Fired Power Plants

Figure 8.6 Gas Delivery Points (Nodes)

Chapter 9

Figure 9.1 An Extensive Wind Park on the way from Gibraltar to Cadiz

Figure 9.5 Increase in Wind Production and Renewables Production as Share of Domestic Usage

Figure 9.2 APX Historical Average Monthly Spot Price

Figure 9.3 Cost Price of Wind Energy per kWh

Figure 9.4 Wind Asset Payoff and In-the-Money (ITM) versus Out-of-the-Money (OTM) price density with respect to the Levelized Cost Price of Electricity (LCOE)

Figure 9.6 Translated Extract from the Official SDE Brochure

Figure 9.7 Payoff of the Subsidies According to the SDE

Chapter 10

Figure 10.1 Washington-Oregon Border

Figure 10.2 Mid-Columbia Daily On-Peak Wholesale Electric Prices

Figure 10.3 Water Flow at the Dalles Dam on the Columbia River

Figure 10.4 Hydroelectric Power Production

Guide

Cover

Table of Contents

Preface

Chapter

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Preface

The Preface presents a preview of what the reader will find if he or she keeps turning the pages of this book. More specifically, I discuss why the book was written and some of the current hot topics in the energy markets. I also give an overview of how this book is organized.

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