Quantitative Methods for Electricity Trading and Risk Management Advanced Mathematical and Statistical Methods for Energy Finance

by Fiorenzani, Stefano

• ISBN13: 9781403943576
• ISBN10: 1403943575
• Format: Hardcover
• Copyright: 2006-04-28
• Publisher: Palgrave Macmillan

Summary

This book presents practical Risk Management and Trading applications for the Electricity Markets. Various methodologies developed over the last few years are considered and current literature is reviewed. The book emphasizes the relationship between trading, hedging and generation asset management.

Table of Contents

List of Tables	viii
List of Figures	ix
Introduction	xi
Part I Distributional and Dynamic Features of Electricity Spot Prices
Liberalized Electricity Markets Organization	3	(5)
The liberalization process	3	(1)
Spot electricity exchanges organization	4	(2)
Electricity derivatives markets: organized exchanges and OTC markets	6	(2)
Electricity Price Driving Factors	8	(11)
Price determination in a liberalized context	8	(4)
Electricity demand driving factors	12	(2)
Electricity supply driving factors	14	(5)
Electricity Spot Price Dynamics and Statistical Features	19	(20)
Preliminary data definitions	19	(3)
Detecting periodic components in electricity prices	22	(8)
Statistical properties of electricity prices	30	(9)
Part II Electricity Spot Price Stochastic Models
Electricity Modeling: General Features	39	(4)
Scope of a financial model	39	(1)
Econometric models versus purely probabilistic models	40	(1)
Characteristics of an ideal model and state of the art	41	(2)
Econometric Modeling of Electricity Prices	43	(8)
Traditional dynamic regression models	44	(2)
Transfer function models	46	(2)
Capturing volatility effects: GARCH models	48	(1)
Capturing long-memory effects in electricity price level and volatility: fractionally integrated models	49	(2)
Probabilistic Modeling of Electricity Prices	51	(20)
Traditional stochastic models	52	(5)
More advanced and realistic models	57	(14)
Appendix Semimartingales in financial modeling	63	(8)
Part III Electricity Derivatives: Main Typologies and Evaluation Problems
Electricity Derivatives: Main Typologies	71	(12)
Exchange-traded derivatives and OTC derivatives	71	(4)
Exotic options	75	(4)
Options typically embedded in electricity physical contracts	79	(4)
Electricity Derivatives: Valuation Problems	83	(12)
Derivative pricing: the traditional approach	83	(2)
The spot-forward price relationship in traditional and electricity markets	85	(3)
Non-storability and market incompleteness	88	(1)
Pricing and hedging in incomplete markets: basic principles	89	(3)
Calibrating the pricing measure	92	(3)
Appendix An equilibrium principle for pricing electricity assets in incomplete markets	93	(2)
Electricity Derivatives: Numerical Methods for Derivatives Pricing	95	(16)
Monte Carlo simulations	95	(3)
The lattice approach	98	(13)
Appendix A Pricing electricity swaptions by means of Monte Carlo simulations	104	(2)
Appendix B Pricing swing options by means of trinomial tree forests	106	(5)
Part IV Real Asset Modeling and Real Options: Theoretical Framework and Numerical Methods
Financial Optimization of Power Generation Activity	111	(16)
Optimization problems and the real option approach	111	(5)
Generation asset modeling: the spark spread method	116	(1)
Generation asset modeling: the stochastic dynamic optimization approach	117	(10)
Appendix Discrete time stochastic dynamic programing	123	(4)
Framing and Solving the Optimization Problem	127	(18)
Optimization problems in a deterministic environment	127	(2)
Naive application of Monte Carlo methods	129	(1)
Solving Bellman's problem	130	(4)
Alternative solution methods: ordinal optimization	134	(11)
Appendix Generation asset modeling: numerical results	136	(9)
Part V Electricity Risk Management: Risk Control Principles and Risk Measurement Techniques
Risk Definition and Mapping	145	(7)
Market risk definition and basic principles	145	(1)
Different risk factors and their mapping onto the company value-creation chain	146	(4)
Risk and opportunity (enterprise risk attitude)	150	(2)
Risk Measurement Methods	152	(13)
Risk measures for financial trading portfolios	152	(9)
Risk measures for physical trading portfolios	161	(4)
Appendix On the coherence of risk measures	163	(2)
Risk-Adjusted Planning in the Electricity Industry	165	(11)
Production value and risk-return measures	166	(4)
Survival performance level and extreme market events	170	(2)
A practical application	172	(4)
Bibliography	176	(3)
Index	179