Energy Trading and Risk Management -- Contents -- Preface -- Acknowledgments -- About the Author -- About the Contributors -- Chapter 1 Energy Markets Fundamentals -- 1.1 Physical Forward and Futures Markets -- 1.2 Spot Market -- 1.3 Intraday Market -- 1.4 Balancing and Reserve Market -- 1.5 Congestion Revenue Rights, Financial Transmission Rights, and Transmission Congestion Contracts -- 1.6 Chapter Wrap-Up -- References -- Chapter 2 Quant Models in the Energy Markets: Role and Limitations -- 2.1 Spot Prices -- 2.1.1 Random Walk Jump-Diffusion Model -- 2.1.2 Mean Reversion: Ornstein-Uhlenbeck Process -- 2.1.3 Mean Reversion: Schwartz Type 1 Stochastic Process -- 2.1.4 Mean Reversion with Jumps -- 2.1.5 Two-Factor Model -- 2.1.6 Negative Prices -- 2.2 Forward Prices -- 2.2.1 Forward and Futures Markets -- 2.2.2 Contango and Backwardation -- 2.3 Chapter Wrap-Up -- References -- Chapter 3 Plain Vanilla Energy Derivatives -- 3.1 Definition of Energy Derivatives -- 3.2 Global Commodity Exchanges -- 3.3 Energy Derivatives Pricing Models -- 3.4 Settlement -- 3.5 Energy Derivatives Quant Models: Role and Limitations -- 3.6 Options -- 3.6.1 Volatility -- 3.7 Vanilla Options -- 3.7.1 Option Style -- 3.7.2 Exchange-Traded and Over-the-Counter Options -- 3.7.3 In-the-Money, At-the-Money, and Out-of-the-Money Options -- 3.7.4 Put-Call Parity -- 3.8 European Options -- 3.9 American Options -- 3.10 Swaps -- 3.11 Swaps to Futures -- 3.12 Chapter Wrap-Up -- References -- Chapter 4 Exotic Energy Derivatives -- 4.1 Asian Options -- 4.1.1 Classes of Asian Options -- 4.1.2 Payoffs of Asian Options -- 4.1.3 Solutions to Asian Options -- 4.1.4 Asian Options in the Energy Markets -- 4.2 Barrier Options -- 4.2.1 Eight Types of Barrier Options -- 4.2.2 Partial Barrier Options -- 4.2.3 Solutions to Barrier Options -- 4.2.4 Barrier Options in the Energy Markets.

4.3 Digital Options -- 4.3.1 Types of Digital Options -- 4.3.2 Solutions to Digital Options -- 4.3.3 Digital Options in the Energy Markets -- 4.4 Real Options -- 4.4.1 Real Options in the Electric Power Markets -- 4.4.2 Case Study: Real Options in the Oil Markets -- 4.4.3 Limitations of the Real Options Valuation Paradigm -- 4.5 Multiasset Options -- 4.5.1 Pricing Multiasset Options -- 4.6 Spread Options -- 4.6.1 Crack Spreads -- 4.6.2 Spark Spreads -- 4.6.3 Dark Spreads -- 4.7 Perpetual American Options -- 4.7.1 Perpetual American Options in the Power Industry -- 4.8 Compound Options -- 4.8.1 Tolling Agreements: Example of Compound Options in Power Markets -- 4.9 Swaptions -- 4.9.1 Energy Swaptions -- 4.10 Swing Options -- 4.11 Chapter Wrap-Up -- References -- Chapter 5 Risk Management and Hedging Strategies -- 5.1 Introduction to Hedging -- 5.2 Price Risk -- 5.3 Basis Risk -- 5.3.1 Basis Risk Case Study -- 5.3.2 Metallgesellchaft Case: Stack and Roll Hedging Disaster -- 5.4 The Option "Greeks" -- 5.5 Delta Hedging -- 5.6 Gamma Hedging -- 5.7 Vega Hedging -- 5.8 Cross-Hedging Greeks -- 5.9 Quant Models Used to Manage Energy Risk: Role and Limitations -- 5.9.1 Regression Analysis -- 5.9.2 Stress Test -- 5.9.3 Value at Risk -- 5.10 Chapter Wrap-Up -- References -- Chapter 6 Illustrations of Hedging with Energy Derivatives -- 6.1 Hedging with Futures Contracts -- 6.1.1 Case Studies and Examples: Hedging with Futures Contracts -- 6.1.2 Risks Associated with Hedging with Futures Contracts -- 6.2 Hedging with Forward Contracts -- 6.3 Hedging with Options -- 6.3.1 Case Study: Call Options Used to Set a "Cap" on Gasoline Prices -- 6.3.2 Example: How Power Generators Use Options on Futures to Hedge -- 6.3.3 Example: How End Users Utilize Options on Futures to Hedge -- 6.3.4 Example: How Power Marketers Use Options on Futures to Hedge.

6.4 Hedging with Swaps -- 6.4.1 Example: Fuel Swap -- 6.4.2 Example: Electricity Swap -- 6.4.3 Case Study: Natural Gas Basis Swap -- 6.5 Hedging with Crack Spread Options -- 6.5.1 Case Study: Hedging with Crack Spread Options -- 6.6 Hedging with Spark Spreads -- 6.6.1 Case Study: Power Producer Uses Spark Spread to Protect Margin -- 6.7 Hedging with Other Energy Derivatives -- 6.8 Chapter Wrap-Up -- References -- Chapter 7 Speculation -- 7.1 Convergence of Energy and Financial Markets -- 7.2 Trading Terminology -- 7.3 Energy Products Trading Codes -- 7.4 Futures Trading Symbols: Month Code Abbreviation -- 7.5 Fundamental and Technical Analyses -- 7.6 Trading Tools: Charts and Quotes -- 7.7 Energy Trading Market Participants -- 7.8 Speculation in the Oil Markets -- 7.9 Speculation in the Electricity Markets -- 7.10 Speculation in the Natural Gas Markets -- 7.11 Chapter Wrap-Up -- References -- Chapter 8 Energy Portfolios -- 8.1 Modern Portfolio Theory -- 8.2 Energy Portfolio Management -- 8.3 Optimization of Electricity Portfolios -- 8.3.1 Case Study: Economic Load Dispatch of a Portfolio of Gas-fired Power Plants -- 8.4 Optimization of Gas Portfolios -- 8.5 Other Energy Portfolio Management Models -- 8.6 Chapter Wrap-Up -- References -- Chapter 9 Hedging Nonlinear Payoffs Using Options: The Case of a New Subsidies Regime for Renewables -- 9.1 Renewable Energy, Options Pricing, and Government Subsidies -- 9.1.1 Power Assets Modeled as a Vanilla Call Option -- 9.1.2 Strike Price of a Wind Turbine -- 9.1.3 Levelized Cost Price of Electricity -- 9.1.4 Wind Turbines' Competitiveness on the Electricity Market -- 9.2 Government Subsidies as a Stochastic Process -- 9.3 Impact of Embedded Options and Stochastic Subsidies on Pricing and Risk Management -- 9.3.1 Pricing of a Wind Turbine and Subsidies as an Embedded Option.

9.3.2 Tail Risk and Hedging Options with Options -- 9.4 Chapter Wrap-Up -- References -- Chapter 10 Case Study: Hydro Power Generation and Behavioral Finance in the U.S. Pacific Northwest -- 10.1 An Overview of Behavioral Finance -- 10.2 Behavioral Finance in Energy Economics -- 10.3 Power Generation in the Pacific Northwest -- 10.4 Behavioral Financing of Projects in the Pacific Northwest -- 10.5 Northwest Power Planning -- 10.5.1 Resource Availability -- 10.5.2 Resource Cost -- 10.5.3 System Flexibility -- 10.5.4 Cost Effectiveness -- 10.5.5 Transmission -- 10.6 Chapter Wrap-Up -- Reference -- Bibliography -- Index.