Energy Trading and Risk Management A Practical Approach to Hedging, Trading and Portfolio Diversification

by Mack, Iris Marie

• ISBN13: 9781118339336
• ISBN10: 1118339339
• Edition: 1st
• Format: Hardcover
• Copyright: 2014-05-12
• Publisher: Wiley

Summary

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.

Author Biography

IRIS MACK, PHD, EMBA, earned a Harvard doctorate in Applied Mathematics and a London Business School Sloan Fellow MBA. She is a former MIT professor and Derivatives Quant/Trader who has worked in financial institutions in the U.S., London, and Asia. She has also spent some of her professional career at NASA, Boeing, and AT&T Bell Laboratories – where she obtained a patent for research on optical fibers.
Dr. Mack lectures and consults on energy derivatives, quantitative finance, and high frequency trading, and serves on various boards, including National Academy of Sciences Transportation Research Board, AlgoAnalytics Trading and Financial Analytics (India), MarketExpress Financial News and Research (India), Women Mentor Women Foundation, and I Can Still Do That Foundation.
Dr. Mack founded Phat Math Inc. and The Global Energy Post in Miami, Florida. She and her colleagues at Phat Math launched their prototype mathematics edutainment social network PhatMath.com. Students in grades K-12 and college have access to free 24/7 online math homework help on PhatMath.com — named one of the Top 50 Social Sites for Educators and Academics and 25 Useful Networking Sites for Grad Students.
To learn more about Iris and her website, please visit www.GlobalEnergyPost.com.

Table of Contents

Introduction
Overview of the Energy Industry: The Big Picture
• Why Invest in the Energy Markets?
• Timeline: Historical Evolution
• Glossary of Key Industry Terms
• Market Participants
• Challenges/Opportunities Associated With Energy Markets
• Ethical Issues

Energy Markets Fundamentals
• Spot Prices
• Basis Prices
• Forward Prices
• Regulations
• Dodd-Frank “Cheat Sheet” for Traders
• Liquidity
• Load Models
• Parity Value
• Settlement
• Mark-to-market

Energy Pricing Models
• Quant Models in the Energy Markets: Role and Limitations
• Spot Price Models
• Basis Price Models
• Load Models
• Forward Price Models
• West Texas Intermediate (WTI) forward curve
• Contango
• Backwardation
• One Factor Models
• Multi-factor Models
• Multi-commodity Models
• Cheapest-to-Deliver
• Model Calibration

Energy Derivatives Pricing Models
• Energy Derivatives Quant Models: Role and Limitations
• European Options
• American Options
• American Cash or Nothing Options
• Perpetual American Options
• Asian Options
• Fixed Strike Asian Call Options
• Average Price Options
• Swing Options
• Barrier Options
• Digital Options
• Exotic Options
• Swaps
• Swaptions
• Refineries as Real Options
• Multi-asset Options
• Compound Options
• Baskets
• Best-of
• Worst-of
• Spread Options
• Spark Spreads
• Crack Spreads
• Basis Spreads
• Natural Gas Transportation as a Locational Spread
• Generation Assets as Strips of Spark Spreads
• Natural Gas Storage as a Basket of Calendar Spreads

Hedging (Risk Management)
• Real-time Risk Management
• How Risk Management and Best Practice Have Evolved
• Regulatory Developments for Risk Management
• How Risk Management Can Make a Competitive Difference
• Pre-trade Risk Control
• Managing Technical Glitches
• Types of Risk
• Market
• Price
• Volatility
• Correlation
• Liquidity
• Commodity
• Capacity
• Delivery
• Storage
• Transmission
• Human
• Credit
• Management
• Modeling
• Quant
• Trader
• Quant Models Used to Manage Energy Risk: Role and Limitations
• Stress Testing
• Value at Risk (VAR)
• Regression Analysis Applied to Hedging
• Single Proxy Hedges
• Multiple Proxy Hedges
• Basis Hedging in Natural Gas Markets
• Delta Hedging
• Delta-Gamma Hedging
• Delta-Gamma-Vega Hedging
• Cross-Hedging Greeks
• Cross-Market Greeks
• Spark Spreads
• Crack Spreads

Speculation ("Trading")
• Fundamentals of Trading in the Following Energy Markets
• Natural Gas
• Electricity (Power)
• Oil
• Coal
• Emissions
• Market Participants
• Technical Analysis
• Fundamental Analysis
• Trading Methodologies
• Transaction Cost Management
• System Development and Testing
• Winning Strategies to Increase Scalability and Diversify Risk

Investment Portfolio Diversification
• Tools and Techniques for Advanced Portfolio Management
• Mathematical Representation of a Portfolio
• Correlation, Dependence and Copula
• Portfolio Risks
• Time Buckets
• Measuring Portfolio Sensitivity via the Greeks
• Delta
• Vega
• Theta
• Gamma
• Rho
• Cross-Gamma
• Mark-to-market
• How to Construct a High Performing, Alpha Yielding Portfolio With Energy Products

Regulations – based on geographical regions
• Natural Gas
• Electricity (Power)
• Oil
• Coal
• Emissions

Energy Data Resources
• How to Identify and Process the Best Data Sources
• Quality of Energy Data Sources

Technology Challenges
• How to Evaluate Energy Technology Providers
• Trading Infrastructure
• Innovation
• Future Trends
• Insourcing vs. Outsourcing
• Solutions to Operational Issues

Advanced Strategies and the Next Generation of Energy Trading and Risk Products
• Energy Trading and Risk Management Products for Attracting Most Interest From Investors, Traders and Managers

Case Studies: Success and Failure
• Best Practices
• Insights and Innovation
• Ethical Issues
• Transparency Demands of Investors
• Governance Issues
• Lack of Liquidity
• Determination of Appropriate Degree of Leverage to Employ
• Developed Markets
• Emerging Global Markets
• My Personal Enron Experiences

Problem Sets with Answer Key
Matlab