Energy Price Risk by Tom James

By Tom James

Strength fee probability is the practitioner's consultant to optimizing corporation functionality utilizing the proper cost danger innovations and instruments. in line with the author's large event within the commodity derivatives undefined, it comprehensively covers the whole spectrum of the power advanced, together with crude oil, petroleum items, ordinary gasoline, LPG/LNG, and electrical energy. utilizing many labored examples, this ebook bargains functional insights and strategies.

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European options are cheaper than American options, but generally more expensive than Asian-style. ■ OTC Asian style – This is the most common option style in the OTC market and they are sometimes called ‘restrospective’ or ‘path-dependent’ options. The reason for this is that they are average price options, with their profit being dependent on the price history of the underlying energy market that is being used as the price reference, either overall or sometimes at a specific stage in the life of the option.

The price risk for the seller of an option can be unlimited (unless the risk is hedged with other options or futures positions) and this is why some companies to this day prohibit their traders from selling options. These companies may consider they do not have good enough controls or systems in place to monitor short sale option price risk exposure. HEDGING IN FUTURES MARKETS The purpose of a hedge is to avoid the risk of adverse market moves resulting in major losses. Because the physical cash markets and futures markets do not always have a perfect price correlation relationship, there is no such thing as a perfect hedge, so there is almost always some profit or loss (basis risk).

For example, consumers of energy are naturally short, always exposed to the prices going higher, unless they hedge. VAR Value At Risk is a type of derivatives position analysis that provides users with a possible profit/loss within a set probability parameter: usually 95% or 99% confidence level over 24 hours. There are different approaches to VAR analysis, and these are discussed in later chapters. Variation Daily movements of debits and credits to and from exchange clearing members, as a result of futures and options positions being markedto-market.

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