Derivatives for energy

Teaching hours and credit allocation: 16 hours, 3 credits
Course assessment: exams

Aims

The aim of this course is to provide the students with a concrete knowledge of the financial markets for energy trading which are nowadays growing at a fast pace all around the world. Financial derivatives can now rapidly influence the mechanism of energy price formation for oil, gas and electricity, even sometimes driving prices up at a very volatile manner. As with most derivatives contracts however, energy derivatives can also be used for both speculation and hedging purposes. Companies can either buy or sell energy derivatives to hedge against fluctuations in the movement of underlying energy prices or to diversify their portfolio whereas speculators can use derivatives to profit from the changes in the underlying price and amplify those profits through the use of leverage. This course shall therefore shed light on these issues combining a rigorous development of mathematical modelling with a compact institutional presentation of the arcane characteristics of commodities that makes the complex analysis of commodities derivative securities.

Learning outcomes

On completing the course students will be able to:

  • familiarize themselves with an advanced study of securities regulation and capital markets
  • become familiar with energy commodities markets and established practices
  • understand the core concepts of securities law doctrine and their practical application in the context of real-world transactions
  • understand and sort objectives pursued when entering a derivatives contract
  • describe the process used by corporations to reduce their risk exposure to the movement of fuel prices in the context of a fuel price risk management
  • assess the importance and the impact of each relevant factor when undertaking a fuel price risk analysis by referring to a variety of perspectives and rations on securities regulation
  • become familiar with all the common standard form contracts used within the industry

Content

  • Overview of Energy Physical and Financial Markets
  • Spot Prices and Forward Curves in Energy Markets
  • Using Energy Futures, Forwards, Swaps
  • Using Energy Options: Hedging and Speculation
  • Hedging Strategy and Risk Metrics
  • Option Strategies and Structured Products
  • Basis Risk Management and Derivatives on Multiple Assets
  • Introduction to Derivatives Valuation and Disclosures