Post on 02-Jan-2016
Book Review: ‘Energy Derivatives: Pricing and Risk Management’ by Clewlow and
Strickland, 2000
Anatoliy Swishchuk
Math & Comp Lab
Dept of Math & Stat, U of C
‘Lunch at the Lab’ Talk
November 7th, 2006
About the Authors: Clewlow, Les
About the Authors: Strickland, Chris
About the Authors: Kaminski, Vince
About the Authors: Kaminski, Vince
About the Authors: Masson, Grant
About the Authors: Chahal, Ronnie
Contents
Preface 11 Chapters References: 125 Index
Chapter 1
Chapter 2
Chapter 3
Chapter 3 (cntd)
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 8 (cntd)
Chapter 9
Chapter 10
Chapter 11
Chapter 11 (cntd)
Chapter 1
Ch. 1 (1.1. Intro to Energy Derivatives)
A Derivative Security: security whose payoff depends on the value of other more basic variables
Deregulation of energy markets: the need for risk management
Energy derivatives-one of the fastest growing of all derivatives markets
The simplest types of derivatives: forward and futures contracts
Ch.1 (Forwards and Futures)
A Futures contract: agreement to buy or sell the underlying asset in the spot market (spot asset) at a predetermined time in the future for a certain price, which is agreed today.
A Forward contract: agreement to transact on fixed terms at a future date, but these are direct between two parties.
F=S exp [(c - y) (T-t)]
Ch.1 (Options Contracts)
Two types: Call and Put Call Options: gives the holder the right, but
not obligation, to buy the spot asset on or before the predetermined date (the maturity date) at a certain price (the strike price), which is agreed today.
Differ from forward and futures: payment at the time the contract is entered into (option price)
Ch.1 (Options Contracts II)
Ch. 1(1.2. Fundamentals of Modelling and Pricing)
F. Black, M. Scholes, R. Merton (1973)-BSM approach
SDE (GBM)
Ch. 1 (1.2. Fundamentals of Modelling and Pricing II)
F. Black, M. Scholes, R. Merton (1973)-BSM approach
PDE
Ch. 1 (1.2. Fundamentals of Modelling and Pricing III)
F. Black, M. Scholes, R. Merton (1973)-BSM approach
Solution
Ch. 1 (1.2. Fundamentals of Modelling and Pricing IV)
Merton (1973) P(T,t)-price at time t of
a pure discount bond with maturity date T
BSM formula
Ch. 1 (1.3. Numerical Techniques)
Trinomial Tree Method (this book) Monte Carlo Simulation (this book) Finite difference schemes (another one) Numerical integration (-//-) Finite element methods (-//-)
Ch. 1 (1.3.1. The Trinomial Method)
Alternative to binomial model by Cox, Ross, Rubinstein (1979): continuous-time limit is the GBM
Provide a better approximation to a continuous price process
Easier to work with (more regular grid and more flexible)
Ch. 1 (1.3.1. The Trinomial Method II)
Ch. 1 (1.3.1. The Trinomial Method III)
Ch. 1 (1.3.1. The Trinomial Method IV)
Ch. 1 (1.3.1. The Trinomial Method V)
Ch. 1 (1.3.1. The Trinomial Method VI)
Ch. 1 (1.3.1. The Trinomial Method VII)
Ch. 1 (1.3.1. The Trinomial Method VIII) (The value of option)
Ch. 1 (1.3.1. The Trinomial Method IX) (‘backward induction’)
Ch. 1 (1.3.1. The Trinomial Method X) (The value of option)
Monte Carlo Simulation (MCS)
MCS: estimation of the expectation of the discounted payoff of an option by computing the average of a large number of discounted payoff computed via simulation
Felim Boyle (UW, 1977)-first applied MCS to the pricing of financial instruments
Monte Carlo Simulation (MCS) II
Monte Carlo Simulation (MCS) III
Monte Carlo Simulation (MCS): Criticisms
The speed with which derivative values can be evaluated (treatment: variance reduction technique)
Inability to handle American options (treatment: combination of tree and simulation)
Summary
The End
Thank You for Your Attention!
Next Talk: Chapter 2: Understanding and Analysing Spot Prices
Speaker: Ouyang, Yuyuan (Lance) November 17, 2006, 12:00pm, MS 543
Distribution list of Chapters:
Ch 1,3,6-Anatoliy Ch 2,7-Lance Ch 4,8-Matt Ch 5,9-Matthew Ch 10-Xu Ch 11-Greg