Energy
CVA pricing for commodities with WWR
A calculation of CVA integrating a commodity futures exposure with probability of an event under WWR and credit downgrades
Intraday power storage and demand optionality
George Levy discusses the value of intraday power storage and demand optionality in UK power contracts
Using derivatives to forecast oil scenarios
Generating probability-weighted oil price scenarios from traded derivatives prices can help risk managers in the industry
Managing energy market volumetric risk
Krzysztof Wolyniec presents a volumetric risk management model for energy markets
P&L attribution for energy portfolios with non-linear exposures
Carlos Blanco and Alessandro Mauro explain how non-linear P&L attribution tools can improve a company’s business intelligence capabilities, be an effective way of benchmarking mark-to-model values, and identify key sources of risk and return on energy…
Identification and capitalisation of non-modellable risk factors
Adolfo Montoro, Tim Becker and Lars Popken propose techniques for systematically capturing and categorising non-modellable risk factors and risk-adequate aggregation
Commodity volatility, skew and inverse leverage effect
Two observations have consequences for commodity risk management and stochastic volatility modelling: the first is that the standard leverage effects in commodities are due to a misspecification and are inefficient proxies for the forward slope effect;…
A profit and loss attribution framework for physical and financial energy portfolios
A profit and loss attribution framework can improve the information available to energy traders and give valuable insight into the health of their portfolios
Simulating meaningful uncertainty for complex energy portfolios
The meaningful uncertainty simulation framework can extract all relevant information contained in market and portfolio data to give energy firms the ability to make informed business decisions
Risk management for whales
Rama Cont and Lakshithe Wagalath propose a portfolio risk model that integrates market risk with liquidation costs. Their model provides a framework for computing liquidation-adjusted risk measures such as liquidation-adjusted value-at-risk. Real-life…
The UK carbon floor and power plant hedging
How to calculate expected future carbon costs and optimal valuation and hedging decisions, by adjusting Monte Carlo simulations for the UK market
How to get maximum value from power plant hedging
It is common practice to delta hedge, ie re-hedge over time, a fuel-fired power plant’s production. Operators switch hedges from yearly to quarterly and monthly forwards as they become more liquid. Marco Miarelli and Margherita Grasso extend the existing…
Quant Ideas: How VAR can add value to energy market analysis
Using traditional financial tools such as value-at-risk can improve market risk analysis in the energy sector
Modelling the financial risks of wind generation with Weibull
This paper discusses the manner in which wind generation can affect the half-hourly APX price and also the risk distributions associated with various power contracts. Wind generation is modelled using correlated doubly truncated Weibull distributions,…
Internal transfer price optimisation for integrated energy firms
By selecting appropriate levels for the internal transfer prices of commodities and risk, an energy company can influence the alignment of its overall risk-return profile with its strategic objectives. Here, Henrik Specht, Sergey Zykov, Tilman Huhne and…
Cutting Edge: Co-simulation of risk factors in power markets
In this article, Jialin Zhao and Sang Baum Kang propose a simple but realistic model to co-simulate the time series of three risk factors: temperature, electricity load and prices. In addition, the authors provide load-serving entities with a…
Anatomy of a model: Valuation of physical assets
This paper dissects the layers of valuation models for physical assets. While their joint functioning is crucial, the integrity of the layers is not always well understood. Rossen Roussev warns of the trend to over-engineer the parts and mis-model the…
Cutting edge: Kriging smooth energy futures curves
This paper applies the method of kriging from geostatistics to extract smooth curves from energy futures prices. How the method can interpolate market prices is demonstrated, both for contracts with fixed delivery times and for delivery over a period,…
Cutting edge: Modelling dependence of price spikes in Australian electricity markets
The deregulation of Australian electricity markets has brought several challenges, including the possibility of price spikes, which expose market participants to significant risks. As Adebayo Aderounmu and Rodney Wolff outline, these spikes are hard to…
Cutting edge: Valuation and optimal hedging of storage contracts in incomplete gas markets
In this paper, Magnus Wobben, Tilman Huhne, Yuri Ivanov and Sebastian Hanneken examine the impact of market incompleteness on the valuation of gas storage contracts. In contrast to prior research, their proposed valuation framework accounts for the…
Cutting edge: Electricity contract risk with portfolio effects
The incremental risk of including electricity contracts in a portfolio is computed by George Levy using a Monte Carlo regime-switching approach. The volume and price processes are modelled using empirical distributions and correlation is captured via a…