"Serving the energy market" - Articles - Trading strategies

Valuation of Commodity-Based Swing Options

no@spam.com (Sergej Obžigailov) — Tue, 13 Dec 2011 14:42:05 CET

Co-author 1: Patrick Jaillet.
Co-author 2: Ehud I. Ronn.
Co-author 3: Stathis Tompaidis.

Abstract
In the energy markets, in particular the electricity and natural gas markets, many contracts incorporate exibility-of-delivery options, known as swing or take-or-pay options. Subject to daily as well as periodic constraints, these contracts permit the option holder to repeatedly exercise the right to receive greater or smaller amounts of energy.
We extract market information from forward prices and volatilities and build a pricing framework for swing options based on a one-factor mean-reverting stochastic process for energy prices which explicitly incorporates seasonal effects. We present a numerical scheme for the valuation of swing options calibrated for the case of natural gas.

Keywords
Swing option, take-or-pay option, mean-reverting stochastic process, seasonal effects in energy prices, natural gas

Link
http://web.mit.edu/jaillet/www/general/swing-last.pdf

A decade of "Rough" storage trading results in the UK NBP gas market

no@spam.com (Cyriel de Jong) — Mon, 26 Apr 2010 21:56:19 CEST

A decade of "Rough" storage trading results in the UK NBP gas market

Authors: Alexander Boogert, Christopher Clancy, Cyriel de Jong (KYOS Energy Consulting)

Date: April 2010

The backtest looks at the performance of different storage trading strategies in the UK NBP gas market. We assess a storage bundle mimicking the characteristics of the Rough storage, the largest in the UK. The backtest period covers 12 years, from 1997 until 2008. Every half year, the storage model calculates the expected storage value over the forthcoming 12 months. This 'projected' present value (ppv) is either the intrinsic value (based on the current forward curve), the rolling intrinsic value (based on changes in the forward prices over time), or the spot-based value. In the backtest, we then carry out the underlying trading strategies in the market over the front 12 months.

Our results indicate that the profitability of storage trading has varied largely over time, mainly due to variations in winter-summer spreads and price volatilities. When a trader would have relied on a pure spot trading strategy only, he would have done very well in some years, but in fact, often performed below expectation (the ppv being the expectation). This research discusses various explanations. However, a combination of a spot trading and a forward market hedging strategy completely changes the picture. The trader performance then matches closely with the expectation and he can be quite sure to realize both the intrinsic and the extrinsic value.

Asynchronous decentralized method for interconnected electricity markets

no@spam.com (Sung-Kwan Joo) — Tue, 11 Aug 2009 16:11:33 CEST

Published in: Electrical power & Energy systems

Publication year: 2007
Co-Author 1: Anni Huang

Co-Author 2: Kyung-Bin Song

This paper presents an asynchronous decentralized method to solve the optimization problem of interconnected electricity markets. The proposed method decomposes the optimization problem of combined electricity markets into individual optimization problems. The impact of neighboring markets’ information is included in the objective function of the individual market optimization problem by the standard Lagrangian relaxation method. Most decentralized optimization methods use synchronous models of communication to exchange updated market information among markets during the iterative process. In this paper, however, the solutions of the individual optimization problems are coordinated through an asynchronous communication model until they converge to the global optimal solution of combined markets. Numerical examples are presented to demonstrate the advantages of the proposed asynchronous method over the existing synchronous methods.

Are electricity risk premia affected by emission allowance prices? Evidence from EEX, Nord Pool and Powernext

no@spam.com (Raphael Markellos) — Tue, 11 Aug 2009 15:40:31 CEST

Published in: Energy Policy

Publication year: 2009
Co-Author 1: George Daskalakis

The links between emission and energy markets are of great interest to practitioners, academics and policy makers. In this paper, it is conjectured that a positive relationship exists between emission allowance spot returns and electricity risk premia within the European Union Emissions Trading Scheme (EU ETS). We discuss how this can be justified on the basis of the substantial uncertainties in the carbon markets. We also argue that this link could be due to trading strategies followed by electricity producers who attempt to exploit their initial allocation of free allowances. Analysis of data from three major markets, the EEX, Nord Pool and Powernext, offers empirical support to our conjecture. These findings have significant policy implications since they imply that efforts should be made in order to reduce the uncertainty in the carbon markets by clearly defining the EU ETS regulative framework and design over the next years. Moreover, our results suggest that the allocation of free allowances and their unrestricted trading enable electricity producers to accomplish windfall profits in the derivatives market at the expense of other market participants.

The Supply of Storage for Natural Gas in California

no@spam.com (Uria Rocio) — Tue, 11 Aug 2009 15:32:30 CEST

Published in: The Energy Journal

Publication year: 2007
Co-Author 1: Jeffrey Williams

Do natural gas storage decisions indistant California respond to NYMEX

futures price spreads? Daily data about flows into and out of storage facilities in California over 2002-2006 and daily spreads on NYMEX are used to investigate whether the net injection profile is consistent with the "supply-of-storage" curve first observed by Working for wheat. Storage decisions in California do seem to be influenced by a price signal that combines the intertemporal spread and the location at basis between California and the Henry Hub, in addition to strong seasonal and weekly cycles that determine net injections to a considerable extent. The timing and magnitude of the price response differ across storage facilities. Regulatory requirements and operational constraints also limit the response to short-lived arbitrage opportunities.

Spark Spread Options Are Hot!

no@spam.com (Michael Hsu) — Thu, 13 Dec 2007 17:18:01 CET

Keywords:
Published in: The Electricity Journal
Publication year: 1998

In a competitive electricity industry, natural gas power plant operators should dispatch a generation unit based on prevailing spot electricity and gas prices. This choice is best described by the “spread option” concepts often discussed in the financial arena. Ignorance of these concepts will inevitably lead to values lost.

The impact of climate policies on the operation of thermal power plants

no@spam.com (Orvika Rosnes) — Mon, 10 Dec 2007 16:25:34 CET

DRAFT

Keywords: electricity, climate policy, decisions under uncertainty, start and stop costs

Changes of price and cost structure are likely to influence the production decision of a power producer. Climate policies influence both power prices and costs of power production. This paper analyses how climate policies influence the power producer's production decision in the short term, when the intertemporal production constraints (start and stop costs) are taken into account. The main result is that increased price variation reduces the flexibility of the producer. As the start-up threshold increases and stopping threshold decreases, the wedge between the threshold prices increases. Higher power price is needed before an idle producer starts to produce, and the power price can drop to a lower level before an active producer stops operation.
Thus, the producer is likely to remain in the current state longer.
However, the effect tapers off as the price variation increases. The lower the initial start-up costs, the less is the impact of increased price variation.

Gas hubs jockey for position

no@spam.com (Cyriel de Jong) — Thu, 01 Nov 2007 11:45:47 CET

Keywords:
Published in: Energy Risk
Publication year: 2003
Co-author 1: Kasper Walet

The Bunde-Oude natural gas hub on the German-Dutch border is the most likely candidate to become the Henry Hub of Europe, according to a survey of European natural gas experts conducted by Maycroft Consultancy Services

Getting physical

no@spam.com (Steve Leppard) — Thu, 11 Oct 2007 14:59:47 CEST

Keywords:
Published in: Energy Risk
Publication year: 2004

Asset-backed trading strategies usually employ a combination of physical positions, which are subject to physical risk; and financial hedging intruments, which are not. Here, Steve Leppard shows how value-at-risk, applied to this combined risk scenario, can go a long way towards the thorny issue of hedging physically risky power generation assets.

The impact of energy derivatives on the crude oil market

no@spam.com (Jeff Fleming) — Thu, 27 Sep 2007 13:18:11 CEST

Keywords: crude oil
Published in: Energy Economics
Publication year: 1999
Co-author 1: Barbara Ostdiek

We examine the effects of energy derivatives trading on the crude oil market. There is a common public and regulatory perception that derivative securities increase volatility and can have a destabilizing effect on the underlying market. Consistent with this view, we find an abnormal increase in volatility for three consecutive weeks following the introduction of NYMEX crude oil futures. While there is also evidence of a longer-term volatility increase, this is likely due to exogenous factors, such as the continuing deregulation of the energy markets. Subsequent introductions of crude oil options and derivatives on other energy commodities have no effect on crude oil volatility. We also examine the effects of derivatives trading on the depth and liquidity of the crude oil market. This analysis reveals a strong inverse relation between the open interest in crude oil futures and spot market volatility. Specifically, when open interest is greater, the volatility shock associated with a given unexpected increase in volume is much smaller.