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
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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)
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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)
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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)
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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)
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F. Black, M.
Scholes, R. Merton
(1973)-BSM
approach
SDE (GBM)
Ch. 1 (1.2. Fundamentals of Modelling and
Pricing II)
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F. Black, M. Scholes, R.
Merton (1973)-BSM
approach
PDE
Ch. 1 (1.2. Fundamentals of Modelling and
Pricing III)
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F. Black, M.
Scholes, R.
Merton (1973)BSM approach
Solution
Ch. 1 (1.2. Fundamentals of Modelling and
Pricing IV)
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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)
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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)
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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)
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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
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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
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Thank You for Your Attention!
Next Talk: Chapter 2: Understanding
and Analysing Spot Prices
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Speaker: Ouyang, Yuyuan (Lance)
November 17, 2006, 12:00pm, MS 543
Distribution list of Chapters:
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Ch 1,3,6-Anatoliy
Ch 2,7-Lance
Ch 4,8-Matt
Ch 5,9-Matthew
Ch 10-Xu
Ch 11-Greg