Energy and Power Risk Management: New Developments in by Eydeland A., Wolyniec K.

By Eydeland A., Wolyniec K.

Compliment for power and tool hazard Management''Energy and gear possibility administration identifies and addresses the main concerns within the improvement of the turbulent strength and the demanding situations it poses to industry gamers. An insightful and far-reaching publication written via well known professionals.''-Helyette Geman, Professor of FinanceUniversity Paris Dauphine and ESSEC''The latest and accomplished e-book on coping with strength rate chance within the typical fuel and gear markets. An absolute important for power investors and effort chance administration professionals.''-Vincent Kaminski, handling DirectorCitadel funding team LLC''Eydeland and Wolyniec's paintings does a very good task of outlining the tools had to degree and deal with hazard within the unstable power market.''-Gerald G. Fleming, vp, Head of East energy buying and selling, TXU power Trading''This e-book combines educational rigor with real-world practicality. it's a must-read for someone in strength probability administration or asset valuation.''-Ron Erd, Senior Vice PresidentAmerican electrical strength

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Additional info for Energy and Power Risk Management: New Developments in Modeling, Pricing, and Hedging

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Consider, for example, the electricity futures delivery volume, which is fixed at 736 MWh all on-peak hours during the contract month with the rate of delivery fixed at 2 MWh. Since the amount of on-peak hours differs from month to month, sometimes Saturdays are added to fit the contractual obligations. Therefore, if the goal is to supply power only during on-peak hours (or during a certain block of on-peak hours, or during off-peak hours, and so on), forward contracts provide a much more flexible tool than futures to meet this goal.

Conversely, if one borrows money to buy an option, the option payoff at the exercise date, combined with the value of the hedge portfolio, will be sufficient to repay the loan. 17). In natural gas and oil markets the forward options are very actively traded for a variety of monthly forward contracts and strike prices. As we shall see, the implied volatilities exhibit significant dependence on the strike price. 17). Consequently, pricing and hedging of those structures require the more sophisticated models described in Chapter 4.

On January 1 (we will denote this date by t0) the July futures price Ft0TC ϭ $50/MWh. Therefore, both parties agree that in July the ETM will deliver a contracted amount of on-peak power, say, 73,600 MWh, and the LSE will pay the fixed price X ϭ $50/MWh for this power. Clearly, with this deal the LSE has reached its goal of minimizing its risk due to volatile summer prices by shifting it to the ETM. In order to manage this risk and to meet its obligations, the ETM has immediately implemented the dynamic hedging strategy.

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