Energy Risk: Valuing and Managing Energy Derivatives [Hardcover]

Dragana Pilipovic (Author)

Book Description

Publication Date: November 1, 1997 | ISBN-10: 0786312319 | ISBN-13: 978-0786312313 | Edition: 1

The electricity, natural gas, and other energy markets are on the brink of becoming THE hot opportunity for institutional investors worldwide. In fact, the growth in volume for NYMEX and IPE energy contracts is the only proof you need of the enormous potential in trading these markets. Now, for the first time, this book gives you step-by-step directions on taking advantage of this developing resource. Energy Risk walks you through properly assessing and evaluating the enormous opportunities that are unique to this complex yet vibrant market. It provides not only an expert overview of energy trading but also the philosophies and specific investment strategies you need. Harvard-trained physicist Dragana Pilipovic reveals the intricacies and mechanics of today's energy markets, provides practical answers on how best to get a foothold in energy trading, and also discusses: In-depth explanations of the primary factors that influence energy risk, such as spot price behavior, volatility, and the forward price curve; A detailed introduction to the fundamental price drivers of energy markets including electricity, natural gas, and heating and crude oil; Clearly defined ways that you can use tools introduced throughout the book to achieve your company's crucial risk/return goals. Containing unique trading models that were custom-designed for managing risk in energy and commodity trading, and with over 175 charts and graphs that illustrate key features of the market's equations, correlations, and methodologies. Energy Risk will be the standard energy market reference for many years to come.

Editorial Reviews

From the Back Cover

Innovative, proven strategies for skillfully trading energy markets. The energy market uses tools and models that are unique and different from those required for traditional financial markets. With the increasing deregulation of the electricity market, energy is on the brink of becoming THE hot opportunity for traders, power marketers, and managers worldwide. Energy Risk: Valuing and Managing Energy Derivatives provides not only an expert overview of energy trading but also the philosophies and strategies necessary for trading and managing risk in this exciting new arena of finance and investing. Dragana Pilipovic, a Harvard-trained physicist now consulting and designing software in the energy markets, has written the first book to discuss the intricacies and mechanics of energy markets. This groundbreaking book provides practical answers on how best to get a foothold in this emerging market. You'll also find: in-depth explanations of the primary factors that influence energy risk, such as spot price behavior, volatility, and the forward price curve; introduction and detailed discussion of the fundamental price drivers of energy markets including electricity, natural gas, and heating and crude oil; specific ways in which risk managers can use tools introduced throughout the book to achieve their companies' risk/return goals. The growth in volume for NYMEX and IPE energy contracts is the only proof you need of the enormous potential in trading and energy markets! Dragana Pilipovic's Energy Risk, with unique trading models for managing risk in energy and commodity trading, contains over 175 charts and graphs that illustrate key features of the market including a wide variety of equations, correlations, and methodologies. Its primarily quantitative approach and well-supported conclusions make it the ideal single-source, desktop manual for getting reasonable answers to actual modeling and implementation problems surfacing in today's complex and exciting energy markets.

About the Author

As the electricity, natural gas, and other energy markets continue to grow in trading volume and importance, investment professionals must know NOW how to properly assess and evaluate problems and opportunities unique to this complex yet vibrant market. Energy Risk: Valuing and Managing Energy Derivatives is the market tested and immediately valuable answer to the many trading and risk management questions that traders, utilities, power marketers, natural gas firms, large end users, and the professionals who help them face in the often-untested waters of energy investment, trading, and risk management . Noted researcher and energy markets innovator Dragana Pilipovic uses her unmatched experience and education, and uniquely valuable insights, to provide an analysis of market behavior that encompasses both fundamental and quantitative analysis. She shows how to establish a modeling process that involves the key players Ñ managers, traders, quantitative analysts, and engineers Ñ and provides practical answers to energy trading and risk management issues. While its comprehensive overview of energy investing and risk management alone make Energy Risk required reading for todayÕs cutting-edge professional, it is the bookÕs detailed analyses and equations, and its presentation of progressively technical information, that make it one of the most complete and valuable manuals available for any market. Energy Risk sets the standard for new market introductory manuals, and will be the standard energy market reference for many years to come.

Product Details

• Hardcover: 248 pages
• Publisher: McGraw-Hill; 1 edition (November 1, 1997)
• Language: English
• ISBN-10: 0786312319
• ISBN-13: 978-0786312313
• Product Dimensions: 9.3 x 7.5 x 0.9 inches
• Shipping Weight: 1.5 pounds
• Average Customer Review: 3.4 out of 5 stars  See all reviews (19 customer reviews)
• Amazon Best Sellers Rank: #1,221,222 in Books (See Top 100 in Books)

More About the Author

Discover books, learn about writers, read author blogs, and more.

Customer Reviews

Most Helpful Customer Reviews

14 of 14 people found the following review helpful:

4.0 out of 5 stars Good book on energy, but read with other books, June 5, 2000

By 

Red Sun (New Jersey) - See all my reviews

This review is from: Energy Risk: Valuing and Managing Energy Derivatives (Hardcover)

Overall a very good book on energy derivatives. The author's pratical experience is very valuable.

But there are quite a few things to improve:

1. The graphs are not good, particularly date axis.

2. Formulae are not typed well, there are some typos. The publisher can certainly uses some improvement. So if possible, derive the formulae by yourself before using them. This may cost you some money !

3. The models described in the books are good, but do not use them blindly. It is better to have have solid derivatives background before using these models. J. Hull's book is a good source.

Again, this is a good book for people with derivatives background. I'd like to see more examples, rigorious treatment of the formulae and expanded modeling techniques.

A must-have for the energy folks...

11 of 11 people found the following review helpful:

4.0 out of 5 stars Powerful Stuff, May 21, 1999

By A Customer

This review is from: Energy Risk: Valuing and Managing Energy Derivatives (Hardcover)

Any trader or "quant" that has experience in pricing electricity options will appreciate the knowledge contained in Dragana Pilipovic's Energy Risk. The hybrid or "split-personality" nature of energy prices is emphasized throughout the book and is summarized in her two-factor price mean-reverting model. The book's entire exposition from option pricing to risk management is solidly grounded to the first few chapters that introduce Pilipovic's modelling framework.

Although the technical implementation issues are barely described, the information in the first 5 chapter should allow any reasonably numerate analyst to kiss goodbye the ambiguity of double Black-Scholes option valuation in favor of a modelling framework that can be statistically parameterized. It is well known that multi-factor pricing models capture higher order moments in the distribution of commodity prices and a Pilipovic's two-factor model captures the significant high and low frequency information in time-series data. The model lends itself well to parameterization through econometric/statistical means even if some nonlinear estimation techniques are required. The importance of analyzing seasonality in energy markets using statistical techniques is also stressed. In these first chapters (and the Appendix of interest rate models) it is evident that Pilipovic's practical ideology combines the most important elements of equity and interest rate models to tackle energy pricing problems. Although, the fundamental mathematical details are often glossed over (you may need occasional access to Springer-Verlag or other more technical publications), the insights offered in the book will convince any quant of the appropriateness of multi-factor models for the energies.

Chapter 6 provides a very good discussion of volatility term structure and its relationship to mean reversion in prices. The nature of term structure of volatility is extended to two-dimensions ("the volatility matrix") in light of Pilipovic's two-factor framework. There is no doubt that the phrase "volatility surface" is being heard just as much a "volatility curve" in today's trading environment. More mathematically inclined readers will recognize the concepts of serial auto-correlation and conditional volatility inherent in energy price processes although the exposition in the book is really practical.

Chapters 7 and 8 at least provide a decent overview of option pricing; but to make the information dangerous, the reader will likely have to pull his or her copies of Wilmott and Hull off the shelf. The discussion of tree methodologies gives the reader just enough information to wet his appetitite and start re-coding those simple binomial models. The jump to trinomial techniques is not well described but because its there the analyst knows its importance (just see Hull).

Introductory information on option greeks, risk mangement, and portfolio analysis is contained in Chapters 9 to 11. Non-detailed but interesting material includes hedging with different duration contracts, return/risk and minimum variance portfolio objectives. The book has numerous typos but corrections are easily obtained either through the publisher or the author herself. The folks at Sava (Pilipovic's Risk Management shop) are even friendly enough to discuss certain aspects of the technical material contained in the book

14 of 16 people found the following review helpful:

1.0 out of 5 stars Of Little Use to Practitioners or Newcomers, September 22, 1999

By A Customer

This review is from: Energy Risk: Valuing and Managing Energy Derivatives (Hardcover)

I also read all of the reviews before purchasing this book. I particularly noted the wide divergence of opinion on this one and sought to give it a go regardless. I have 15+ years in the Energy sector and financial markets. This book was a big disappointment and I have returned it for a refund. The works by Fusaro and Errera are better choices and Amazon sells them at competitive prices (I have no connection with any authors or publishers).