Volatility and Correlation in the Energy Market

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Volatility and Correlation in the Energy Market

In 1973, Black and Scholes revolutionised the trading of financial securities – but their option pricing model made two important assumptions. Firstly that the price of the underlying asset changes continuously and secondly that the volatility of an underlying security is constant and known. In the energy markets it is now widely accepted that both of these assumptions are far from true. The dynamics of gas and electricity prices is frequent subject to discontinuous jumps, called spikes, in the underlying. In addition the volatility of the underlying can fluctuate widely. This random behaviour has led to renewed efforts in producing an effective stochastic volatility model appropriate for the energy market. This course will provide participants with the necessary quantitative tools to assess jumps and uncertain volatility in energy markets and incorporate this information in the modelling of derivative contracts.
Most energy exchanges organize trade in forward and futures contracts which are settled financially on the underlying spot commodity. The course will explain the link between the “physical” spot markets and the forward/futures, and give directions in efficient modelling of forward/futures prices based on either a spot-approach or a direct (Heath-Jarrow-Morton, HJM) approach. Features like seasonality, spikes and the Samuelson effect must be accounted for when modelling the dynamics of energy prices. The risk premium, being the premium charged for taking on the risk from a producer when buying a forward contract, plays an important role in the modelling and analysis of energy markets.
On energy exchanges plain-vanilla options are traded on forward and futures contracts, which call for practically tractable models for these assets. On the other hand, there exists a wide range of various more exotic options in the market with the spot as underlying, as well as other variables like weather, say. Volatility and correlation are important parameters in the trading and hedging of positions as well as in risk management. Participants will learn how to test and select the best model for their purpose. As the market for energy derivatives is expected to continue in rapid growth, the understanding of the uncertain nature of volatility has never been more important for market practitioners and theoreticians alike. This 2-day PC-based workshop will provide delegates with both a practical understanding of volatility and correlation dependent products, and a theoretical understanding of some of the more popular stochastic volatility processes used in modelling these products.
About your expert trainer:
Dr. Simon Acomb has 22 years experience in quantitative finance. He started his career in finance in 1992 at Barclays in the Equities Derivatives Group and progressed to run the quantitative research team. This was followed by five years at Commerzbank where he established a derivatives proprietary trading team and then became head of the quantitative research group. Most recently Simon has been a managing director at Morgan Stanley as global head of the Equities Analytic Modelling Group. He now works as a consultant to international investment banks as well as being a lecturer and honorary research fellow at Manchester University. Simon has a PhD in Applied Mathematics from Oxford University.
Prof. Fred Espen Benth has for the last 15 years focused his research on the mathematics of energy markets. He has written more than 80 papers published in scientific journals, as well as two books on modelling and pricing in energy and weather markets. Fred has led several intensive courses for the energy industry in Europe, as well as worked as a consultant for some of the major insurance and power companies in Norway. He is member of the editorial board of several scientific journals as well as leading a special thematic year on Energy and Environmental Finance at the Wolfgang Pauli institute in Vienna.

Location:

London, United Kingdom

Country:

United Kingdom

Start Date:

Nov 10, 2014

End Date:

Nov 11, 2014

Organizer:

N/A

Sectors:

Business & Finance
Education