The Handbook of Energy Trading E-Book

Stefano Fiorenzani

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

Seitenzahl: 390

Veröffentlichungsjahr: 2011

Beschreibung

To thrive in today's booming energy trading market you need cutting-edge knowledge of the latest energy trading strategies, backed up by rigorous testing and practical application Unique in its practical approach, The Handbook of Energy Trading is your definitive guide. It provides a valuable insight into the latest strategies for trading energy--all tried and tested in maintaining a competitive advantage--illustrated with up-to-the-minute case studies from the energy sector. The handbook takes you through the key aspects of energy trading, from operational strategies and mathematical methods to practical techniques, with advice on structuring your energy trading business to optimise success in the energy market. * A unique integrated market approach by authors who combine academic theory with vast professional and practical experience * Guidance on the types of energy trading strategies and instruments and how they should be used Soaring prices and increasingly complex global markets have created an explosion in the need for robust technical knowledge in the field of energy trading, derivatives, and risk management. The Handbook of Energy Trading is essential reading for all energy trading professionals, energy traders, and risk managers, and in fact anyone who has ever asked: 'what is energy trading?'

Leseprobe

Table of Contents

Series Page

Title Page

Copyright

Dedication

List of Figures

List of Tables

Preface

Acknowledgements

Chapter 1: Energy Markets as Efficient Markets

1.1 The “Efficient Market Hypothesis”

1.2 Mathematical Framework

1.3 Martingale Hypothesis

1.4 Violations of EMH and Behavioural Finance

1.5 Information Asymmetries and Accelerating Processes

1.6 The Peculiar Structure and Nature of Energy Commodities Markets

1.7 EHM in Energy Commodities Markets: Some Evidence from Data

1.8 Subordination, Trading Volume and Efficient Market Hypothesis

1.9 Subordination and Stochastic Timescales

Chapter 2: Directional Trading

2.1 Definitions and Main Features

2.2 Market Products for Directional Trading

2.3 Price Trend Determination

2.4 Strategic Asset Allocation Methods

Chapter 3: Spread Trading

3.1 Spread Definition and Identification

3.2 Non-Stationarity and Cointegration

3.3 Empirical Analysis of Energy Spread Trading Strategies

3.4 Empirical Analysis of Energy Spreads and Spread Trading Strategies

3.5 Combining Directional and Spread Trading Strategies

Chapter 4: Options and Non-Linear Derivatives

4.1 The Essence of Non-Linearity

4.2 Exotic Options

4.3 Combinations

4.4 Value Bounds and Parity Relationship

4.5 Basics on Option Pricing

4.6 The Greeks

4.7 Adjusting the Continuous Time Dynamic Hedging Framework

4.8 Case Study

Chapter 5: Structured Products on Energy

5.1 Structured Products on Energy: Main Typology

5.2 Retail Structured Products

5.3 Wholesale Structured Products

5.4 Hedge in Incomplete Markets

5.5 Case Study: Structured Products

Chapter 6: Metatrading Strategies and Capital Allocation Techniques

6.1 Metatrading Definition and Fundamental Elements

6.2 Macroeconomic Megatrends: Understanding and Analysis

6.3 Trading Business Organizational Issues

6.4 Capital Management Principles

Bibliography

Index

For other titles in the Wiley Finance series please see

This edition first published in 2011

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Library of Congress Cataloging-in-Publication Data

Fiorenzani, Stefano.

The handbook of energy trading / Stefano Fiorenzani, Samuele Ravelli, Enrico Edoli.

p. cm.

ISBN 978-1-119-95369-2

1.  Energy industries. 2.   Power resources. 3.  Commodity exchanges. I.  Ravelli, Samuele. II.  Edoli, Enrico. III.  Title.

HD9502.A2.F567 2012

332.64′4–dc23

2011043012

ISBN 978-1-119-95369-2 (hbk), ISBN 978-1-119-95454-5 (ebk),

ISBN 978-1-119-95456-9 (ebk), ISBN 978-1-119-95455-2 (ebk)

A catalogue record for this book is available from the British Library.

List of Tables

1.1ADF on WTI daily prices1.2ADF on WTI daily returns1.3ADF on Henry Hub daily prices1.4ADF on HH daily returns1.5ADF on EEX daily prices1.6ADF on EEX daily returns1.7WTI Cowles Jones1.8HH Cowles Jones1.9EEX Cowles Jones1.10WTI variance ratio1.11HH variance ratio1.12EEX variance ratio1.13ADF on WTI intraday returns1.14Estimation results variance linear regression2.1Statistical trading strategy on ARMA3.1ADF on Italian spark spread level3.2Italian spark spread strategy3.3ADF on oil time spread level3.4Oil time spread strategy3.5ADF on location spread level3.6Location spread strategy3.7Target function computed as the strategy result in case of success (scenario up) minus 10 times (e.g. generically n) the risk limit overused (risk limit €5)4.1Factors influencing call and put values. The symbol represents an increasing value, while represents a decreasing value4.2Value of a portfolio composed of a long position on a call (with underlying futures ICE Brent 3 months, strike $120) and the underlying. For every trading date the value of the portfolio, calculated as described, is shown, both before and after the rebalancing5.1Main features of structured products5.2Merchant vs proprietary perspective on structured products5.3Virtual power plant's operational constraints5.4Parameters of a Virtual Gas Storage5.5VPP parameters5.6Swing parameters5.7Summary of test case characteristics5.8Summary of test case characteristics

Preface

Over the past ten years energy trading has proved one of the most capital attractive of businesses. Both in the US and in Europe energy trading has become a fundamental activity for utilities (vertically integrated energy companies), investment banks and hedge funds, enticing a lot of experienced staff from other (more established) trading sectors such as equity, FX or fixed income. Probably due to this fast, and perhaps unexpected, growth in importance, energy trading has developed without the support of either precise or ad hoc benchmarks in terms of organization, management and control, something its complex nature desperately requires.

Energy trading is not just of interest to energy traders, it is also relevant to a very wide range of other professionals engaged in the business, such as energy analysts, risk managers and, last but not least, energy trading managers. This book is intended to cover in a detailed way all the various aspects of energy trading from the most macro to the most micro. Dealing so thoroughly with every topic gave us the chance to analyze many aspects of the business in depth with the aim of providing support to energy trading managers, energy traders and energy trading analysts as well as trying to bridge the worlds of practitioners and academic research. Obviously, in order to be at the cutting edge of every topic discussed we could not avoid the occasional use of technical language or a pretty complex mathematical one. But, we genuinely believe that anyone choosing to read this book is ready for something more than the basics and we wanted to provide them with something more advanced.

Trading in general and energy trading in particular is not a pure science but rather a complex mix of scientific techniques and emotional behaviours. It is impossible to gain a complete understanding of the topic using just one approach. For that reason we will try to explore and critically revise all the potential trading approaches that can result in profits in the energy sector. In particular, the book condenses our combined professional experience in the field, covering quantitative analysis, trading, risk management as well as the managerial aspects of the energy trading business.

In order to keep our readers on their toes in every chapter we alternate theoretical discussion with practical applications and examples. In our view practical applications are important to clarify and exemplify theoretical discussion and sometimes also to show that the use of mathematical complexity is justified and not merely an exercise in aesthetics. We have tried hard to avoid unnecessary complexity, just as we have always tried to avoid dangerous simplifications.

The book seeks to answer questions like: why is energy trading different from any other trading business? Where are those differences? Are energy markets efficient markets or do inefficiencies allow for extra profits? How should we structure an energy trading business in order to maximize the probability of being successful? How many energy trading strategies and energy trading instruments can we use and how should we use them in order to be successful?

The book consists of six chapters, ranging from practical studies of the efficiency of energy markets to quantitative analysis of derivatives and portfolio strategies. Despite the highly theoretical nature of some of the topics analyzed, we have been careful not to lose sight of the practical aspects. The first chapter gives a detailed analysis of the efficiency of energy markets, combining traditional statistical analysis tools with our own market insight. Next follow the presentation and critical revision of the most used energy trading strategies, focusing on different approaches, different markets and trading instruments. The presentation is tailor-made for energy markets, and not merely a simple application of existing theory to energy markets. With many factual examples, and numerical schemes for practical implementation, we intend to provide helpful insights for readership in both academia and industry.

The book ends by dealing with the more macro aspects of energy trading (designated as metatrading elements) such as macroeconomic trends determination, organizational, capital allocation and risk management issues. We believe that this book is comprehensive in setting out for the reader all the relevant problems connected with an energy trading business. On some issues firm solutions to problems have been provided, on others we were simply happy to be the first to engage in discussion!

Stefano Fiorenzani

Samuele Ravelli

Enrico Edoli

The views, opinions, positions or strategies expressed by Samuele Ravelli are his alone, and do not necessarily reflect the views, opinions, positions or strategies of E.ON Energy Trading SE.

Acknowledgements

We would like to express our gratitude to the following people for their conceptual and material help.

to Carlo Occhiena for many profitable discussions on technical trading techniques, which helped us fine tune the details of directional trading strategies;

to Tiziano Varigiolu for his generous advise on both conceptual and technical matters.

Writing a book together means continuously challenging each other, reviewing every section and try to organize the various constituent parts into a whole. So we would like to thank one another for the common collaborative effort aiming at the very best result.

We are also grateful for the challenging comments we received from our anonymous referees preparatory to publishing.

The responsibility for any remaining errors is ours alone.

Stefano Fiorenzani

Samuele Ravelli

Enrico Edoli

Chapter 1

Energy Markets as Efficient Markets

1.1 The “Efficient Market Hypothesis”

Are energy markets efficient markets? In what sense can a commodity market be considered efficient? And what are the trading implications of market efficiency? These are the questions we would like to answer in this introductory chapter. The third question, in particular, has a strong impact on the overall meaning of the book, but obviously, before discussing the trading implications of market efficiency we need to define the concept formally and to try to understand if energy markets can be considered efficient in some sense.

The theoretical origins of the Efficient Markets Hypothesis (EMH) are connected with pioneering studies of modern financial economics. The first formal definition and in depth analysis must surely refer to the studies of Roberts (1967) and Fama (1970). Whenever we say that a market, a financial market particularly, is efficient we basically refer to efficiency in the informational sense. In fact, in a competitive market, asset prices dynamically reflect relevant information flows and consequently a certain market is more informationally efficient if it is able to reflect more relevant information in its asset prices. Information is thus relevant if it can predict future price dynamics. According to Fama's original definition, a capital market is said to be efficient with respect to a certain information set if security prices would be unaffected by revealing that information to all market participants. Hence, the description of the information set is the base for the definition of market efficiency.