The course is highly practical: throughout the course you will work on case studies with specialized analysis models for plant valua- tion and hedging analysis. The models will be provided to you for the duration of the course plus a month thereafter. Apart from case studies, the course also features an energy trading game. The goal is to optimize a portfolio of power plants, while hedging in the market and responding to news.
Session 1: European gas markets and gas storage developments
- Overview & development European gas markets and trading hubs
- Traditional use of flexibility instruments
- Overview of swing / Take-or-Pay contracts
Session 2: Storage valuation: Trading forwards in a dynamic hedging strategy
- intrinsic, rolling intrinsic and basket-of-spreads valuation
- Overview valuation approaches to physical and financial storage
- Forward curve building: from tradable contracts to an ‘expected’ curve
- Understanding intrinsic value
- Developing a cash-flow valuation model for a storage investment
Session 3: Gas price dynamics and the real option approach to storage & swing
- Volatility definitions (historical versus implied) and estimation procedures for spot and forward prices
- Mean reversion: definition, estimation approaches and impact of seasonality
- Forward curve dynamics: short-term, long-term and summer-winter spread
- Correlation and cointegration between gas and oil prices
- A storage as a basket of time-spreads
- Pricing American-style options: a tree based approach versus least-squares Monte Carlo
Session 4: Applying storage / swing valuation and hedging strategies in practice
- Assumptions behind different valuations: impact of market liquidity constraints, volatility, mean-reversion and interpreting delta hedges
- Guidelines for setting up a backtest