Quantitative Methods for Electricity Trading and Risk Management: Advanced Mathematical and Statistical Methods for Energy Finance (Finance and Capital Markets)

✍ Scribed by Stefano Fiorenzani

• Publisher: Palgrave Macmillan
• Year: 2006
• Tongue: English
• Leaves: 196
• Series: Finance and Capital Markets
• Category: Library

✦ Synopsis

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

Cover......Page 1
Contents......Page 6
List of Tables......Page 9
List of Figures......Page 10
Introduction......Page 12
Part I: Distributional and Dynamic Features of Electricity Spot Prices......Page 16
1.1 The liberalization process......Page 18
1.2 Spot electricity exchanges organization......Page 19
1.3 Electricity derivatives markets: organized exchanges and OTC markets......Page 21
2.1 Price determination in a liberalized context......Page 23
2.2 Electricity demand driving factors......Page 27
2.3 Electricity supply driving factors......Page 29
3.1 Preliminary data definitions......Page 34
3.2 Detecting periodic components in electricity prices......Page 37
3.3 Statistical properties of electricity prices......Page 45
Part II: Electricity Spot Price Stochastic Models......Page 52
4.1 Scope of a financial model......Page 54
4.2 Econometric models versus purely probabilistic models......Page 55
4.3 Characteristics of an ideal model and state of the art......Page 56
5 Econometric Modeling of Electricity Prices......Page 58
5.1 Traditional dynamic regression models......Page 59
5.2 Transfer function models......Page 61
5.3 Capturing volatility effects: GARCH models......Page 63
5.4 Capturing long-memory effects in electricity price level and volatility: fractionally integrated models......Page 64
6 Probabilistic Modeling of Electricity Prices......Page 66
6.1 Traditional stochastic models......Page 67
6.2 More advanced and realistic models......Page 72
Appendix: Semimartingales in financial modeling......Page 78
Part III: Electricity Derivatives: Main Typologies and Evaluation Problems......Page 84
7.1 Exchange-traded derivatives and OTC derivatives......Page 86
7.2 Exotic options......Page 90
7.3 Options typically embedded in electricity physical contracts......Page 94
8.1 Derivative pricing: the traditional approach......Page 98
8.2 The spot-forward price relationship in traditional and electricity markets......Page 100
8.3 Non-storability and market incompleteness......Page 103
8.4 Pricing and hedging in incomplete markets: basic principles......Page 104
8.5 Calibrating the pricing measure......Page 107
Appendix: An equilibrium principle for pricing electricity assets in incomplete markets......Page 108
9.1 Monte Carlo simulations......Page 110
9.2 The lattice approach......Page 113
Appendix A: Pricing electricity swaptions by means of Monte Carlo simulations......Page 119
Appendix B: Pricing swing options by means of trinomial tree forests......Page 121
Part IV: Real Asset Modeling and Real Options: Theoretical Framework and Numerical Methods......Page 124
10.1 Optimization problems and the real option approach......Page 126
10.2 Generation asset modeling: the spark spread method......Page 131
10.3 Generation asset modeling: the stochastic dynamic optimization approach......Page 132
Appendix: Discrete time stochastic dynamic programing......Page 138
11.1 Optimization problems in a deterministic environment......Page 142
11.2 Naïve application of Monte Carlo methods......Page 144
11.3 Solving Bellman’s problem......Page 145
11.4 Alternative solution methods: ordinal optimization......Page 149
Appendix: Generation asset modeling: numerical results......Page 151
Part V: Electricity Risk Management: Risk Control Principles and Risk Measurement Techniques......Page 158
12.1 Market risk definition and basic principles......Page 160
12.2 Different risk factors and their mapping onto the company value-creation chain......Page 161
12.3 Risk and opportunity (enterprise risk attitude)......Page 165
13.1 Risk measures for financial trading portfolios......Page 167
13.2 Risk measures for physical trading portfolios......Page 176
Appendix: On the coherence of risk measures......Page 178
14 Risk-Adjusted Planning in the Electricity Industry......Page 180
14.1 Production value and risk–return measures......Page 181
14.2 Survival performance level and extreme market events......Page 185
14.3 A practical application......Page 187
Bibliography......Page 191
Index......Page 194