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

Book Description

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.

    Table of Contents

    1. Preface
    2. Acknowledgements
    3. About the Author
    4. About the Contributors
    5. Chapter 1: Energy Markets Fundamentals
      1. 1.1 Physical Forward and Futures Markets
      2. 1.2 Spot Market
      3. 1.3 Intraday Market
      4. 1.4 Balancing and Reserve Market
      5. 1.5 Congestion Revenue Rights, Financial Transmission Rights, and Transmission Congestion Contracts
      6. 1.6 Chapter Wrap-Up
      7. References
    6. Chapter 2: Quant Models in the Energy Markets: Role and Limitations
      1. 2.1 Spot Prices
      2. 2.2 Forward Prices
      3. 2.3 Chapter Wrap-Up
      4. References
    7. Chapter 3: Plain Vanilla Energy Derivatives
      1. 3.1 Definition of Energy Derivatives
      2. 3.2 Global Commodity Exchanges
      3. 3.3 Energy Derivatives Pricing Models
      4. 3.4 Settlement
      5. 3.5 Energy Derivatives Quant Models: Role and Limitations
      6. 3.6 Options
      7. 3.7 Vanilla Options
      8. 3.8 European Options
      9. 3.9 American Options
      10. 3.10 Swaps
      11. 3.11 Swaps to Futures
      12. 3.12 Chapter Wrap-Up
      13. References
    8. Chapter 4: Exotic Energy Derivatives
      1. 4.1 Asian Options
      2. 4.2 Barrier Options
      3. 4.3 Digital Options
      4. 4.4 Real Options
      5. 4.5 Multiasset Options
      6. 4.6 Spread Options
      7. 4.7 Perpetual American Options
      8. 4.8 Compound Options
      9. 4.9 Swaptions
      10. 4.10 Swing Options
      11. 4.11 Chapter Wrap-Up
      12. References
    9. Chapter 5: Risk Management and Hedging Strategies
      1. 5.1 Introduction to Hedging
      2. 5.2 Price Risk
      3. 5.3 Basis Risk
      4. 5.4 The Option “Greeks”
      5. 5.5 Delta Hedging
      6. 5.6 Gamma Hedging
      7. 5.7 Vega Hedging
      8. 5.8 Cross-Hedging Greeks
      9. 5.9 Quant Models Used to Manage Energy Risk: Role And Limitations
      10. 5.10 Chapter Wrap-Up
      11. References
    10. Chapter 6: Illustrations of Hedging with Energy Derivatives
      1. 6.1 Hedging with Futures Contracts
      2. 6.2 Hedging with Forward Contracts
      3. 6.3 Hedging with Options
      4. 6.4 Hedging with Swaps
      5. 6.5 Hedging with Crack Spread Options
      6. 6.6 Hedging with Spark Spreads
      7. 6.7 Hedging with Other Energy Derivatives
      8. 6.8 Chapter Wrap-Up
      9. References
    11. Chapter 7: Speculation
      1. 7.1 Convergence of Energy and Financial Markets
      2. 7.2 Trading Terminology
      3. 7.3 Energy Products Trading Codes
      4. 7.4 Futures Trading Symbols: Month Code Abbreviation
      5. 7.5 Fundamental and Technical Analyses
      6. 7.6 Trading Tools: Charts and Quotes
      7. 7.7 Energy Trading Market Participants
      8. 7.8 Speculation in the Oil Markets
      9. 7.9 Speculation in the Electricity Markets
      10. 7.10 Speculation in the Natural Gas Markets
      11. 7.11 Chapter Wrap-Up
      12. References
    12. Chapter 8: Energy Portfolios
      1. 8.1 Modern Portfolio Theory
      2. 8.2 Energy Portfolio Management
      3. 8.3 Optimization of Electricity Portfolios
      4. 8.4 Optimization of Gas Portfolios
      5. 8.5 Other Energy Portfolio Management Models
      6. 8.6 Chapter Wrap-Up
      7. References
    13. Chapter 9: Hedging Nonlinear Payoffs Using Options: The Case of a New Subsidies Regime for Renewables
      1. 9.1 Renewable Energy, Options Pricing, and Government Subsidies
      2. 9.2 Government Subsidies as a Stochastic Process
      3. 9.3 Impact of Embedded Options and Stochastic Subsidies on Pricing and Risk Management
      4. 9.4 Chapter Wrap-Up
      5. References
    14. Chapter 10: Case Study: Hydro Power Generation and Behavioral Finance in the U.S. Pacific Northwest
      1. 10.1 An Overview of Behavioral Finance
      2. 10.2 Behavioral Finance in Energy Economics
      3. 10.3 Power Generation in the Pacific Northwest
      4. 10.4 Behavioral Financing of Projects in The Pacific Northwest
      5. 10.5 Northwest Power Planning
      6. 10.6 Chapter Wrap-Up
      7. Reference
    15. Bibliography
    16. Index
    17. Wiley End User License Agreement