Subject: re : preface for book
julie ,
no problem . it ' s your call but chris should also be mentioned as number one .
vince
" julie " on 08 / 03 / 2000 03 : 06 : 28 pm
to : " vince j kaminski "
cc :
subject : re : preface for book
vince ,
thanks for this . ? ?
?
are you ok with us using your name for this ? ?
?
julie
- - - - - original message - - - - -
from : vince j kaminski
to : julie @ lacima . co . uk
sent : wednesday , august 02 , 2000 2 : 11 pm
subject : re : preface for book
- - - - - - - - - - - - - - - - - - - - - - forwarded by vince j kaminski / hou / ect on 08 / 02 / 2000
08 : 16
am - - - - - - - - - - - - - - - - - - - - - - - - - - -
vince j kaminski
08 / 02 / 2000 08 : 09 am
to : ? ? " julie " @ enron
cc : ? ? vince j kaminski / hou / ect @ ect , grant masson / hou / ect @ ect
subject : ? re : preface for book ? ( document link : vince j kaminski )
julie ,
the introduction looks fine . i have made some cosmetic changes
( typos and split infinitives that slipped by ) . you can safely ignore most of
them .
english is not even my second language .
the corrections are in pink .
vince
( see attached file : introo 802 . doc )
" julie " on 08 / 01 / 2000 07 : 43 : 10 am
to : ? ? " vincejkaminski "
cc :
subject : ? preface for book
vince ,
hope you are well .
we spoke a while ago about who should write the preface for the book , and ?
you
kindly offered that you would provide this . is this still ? possible ? we
realise that you are extremely busy , so chris and les went ? ahead and wrote
something , which is below , and if you want to review , change or ? re - write the
preface , that would be very appreciated . let me know ? what your thoughts
are .
thanks ,
julie
( we ' re getting close )
preface
one of our main objectives in ? writing energy derivatives : pricing and risk
management has been to bring ? together as many of the various approaches
for the
pricing and risk management ? energy derivatives as possible , to discuss
in - depth
the models , and to show how ? they relate to each other . in this ? way we hope
to
help the reader to analyse the different models , price a wide ? range of
energy
derivatives , or to build a risk management system which uses a ? consistent
modelling framework . we ? believe that for practitioners this last point is
very
important and we continue ? to stress in our articles and presentations the
dangers of having flawed risk ? management and giving arbitrage opportunities
to
your competitors by using ? ad - hoc and inconsistent models for different
instruments and markets ( see also others who propose consistent ? models ? ) .
however , it is not ? our wish to concentrate on one particular model or
models ,
at the exclusion of ? the others because we believe that the choice should
rest
with the user ? ( although it will probably be clear from our discussions the
model ( s ) we ? prefer ) . we therefore try and give ? as clear account as possible
of the advantage and disadvantages of all the ? models so that the reader can
make an informed choice as to the models which ? best suit their needs .
in order to meet our objectives the ? book is divided into 11 chapters . ? in
chapter 1 we give an overview of the fundamental principals needed to ?
model and
price energy derivatives which will underpin the remainder of the ? book . in
addition to introducing ? the techniques that underlie the black - scholes
modelling framework we outline ? the numerical techniques of trinomial trees
and
monte carlo simulation for ? derivative pricing , which are used throughout the
book .
in chapter 2 we discuss the ? analysis of spot energy prices . as ? well as
analysing empirical price movements we propose a number of processes ? that
can
be used to model the prices . ? we look at the well - know process of geometric
brownian motion as well as ? mean reversion , stochastic volatility and jump
processes , discussing each and ? showing how they can be simulated and their
parameters estimated .
chapter 3 , written by vince ? kaminski , grant masson and ronnie chahal of
enron
corp . , discusses volatility ? estimation in energy commodity markets . ? this
chapter builds on the previous one . it examines in detail the methods , ?
merits
and pitfalls of the volatility estimation process assuming different ? pricing
models introduced in chapter 2 . ? examples from crude , gas , and electricity
markets are used to illustrate ? the technical and interpretative aspects of
calculating volatility .
chapter 4 examines forward curves ? in the energy markets . although ? such
curves
are well understood and straight - forward in the most financial ? markets , the
difficulty of storage in many energy markets leads to less well ? defined
curves .
in this chapter we ? describe forward price bounds for energy prices and the
building of forward ? curves from market instruments . we ? outline the three
main
approaches which have been applied to building forward ? curves in energy
markets ; the arbitrage approach , the econometric approach , and ? deriving
analytical values by modelling underlying stochastic factors .
chapter 5 presents an overview of ? structures found in the energy derivative
markets and discusses their uses . examples of products analysed in this
chapter include a variety of swaps , caps , floors and collars , as well as
energy
swaptions , compound options , asian options , barrier options , lookback
options ,
and ladder options .
chapter 6 investigates single and ? multi - factor models of the energy spot
price
and the pricing of some standard ? energy derivatives . closed form ? solutions
for forward prices , forward volatilities , and european option prices ? both on
the spot and forwards are derived and presented for all the models in ? this
chapter including a three factor , stochastic convenience yield and interest
rate model .
chapter 7 shows how the prices of ? path dependent and american style options
can
be evaluated for the models in ? chapter 6 . simulation schemes are ? developed
for the evaluation of european style options and applied to a variety ? of
path
dependent options . in order ? to price options which incorporate early
exercise
opportunities , a trinomial ? tree scheme is developed . this tree ? is built to
be
consistent with the observed forward curve and can be used to ? price exotic
as
well as standard european and american style options .
chapter 8 describes a methodology ? for valuing energy options based on
modelling
the whole of the market observed ? forward curve . the approach results ? in a
multi - factor model that is able to realistically capture the evolution of a
wide range of energy forward curves . ? the user defined volatility structures
can be of an extremely general ? form . closed - form solutions are ? developed
for
pricing standard european options , and efficient monte carlo ? schemes are
presented for pricing exotic options . the chapter closes with a discussion of
the valuation of american style options .
chapter 9 focuses on the risk ? management of energy derivative positions . ?
in
this chapter we discuss the management of price risk for institutions ? that
trade options or other derivatives and who are then faced with the problem ?
of
managing the risk through time . ? we begin with delta hedging a portfolio
containing derivatives and look ? at extensions to gamma hedging ?
illustrating
the techniques using both spot and ? forward curve models . the general ? model
presented in chapter 8 is ideally suited to multi - factor hedging of a ?
portfolio
of energy derivatives and this is also discussed .
chapter 10 examines the key risk ? management concept of value at risk ( var )
applied to portfolios containing ? energy derivative products . after ?
discussing
the concept of the measure , we look at how the key inputs ? ( volatilities ,
covariances , correlations , etc ) can be estimated . we then compare the fours
major ? methodologies for computing var ; delta , delta - gamma , historical
simulation and ? monte - carlo simulation , applying each to the same portfolio
of
energy ? options . in this chapter we also ? look at testing the var estimates
for
various underlying energy market ? variables .
finally , in chapter 11 we review ? modelling approaches to credit risk . ? we
look
in detail at two quite different approaches , creditmetrics ( j . p . morgan
( 1997 ) )
and ? creditrisk + ( credit suisse financial ? products ( 1997 ) ) for which
detailed
information is publicly available . together these provide an extensive set ?
of
tools with which to measure credit risk . we present numerical examples of
applying these techniques to energy derivatives .
before ? we begin we stress that the models and methods we present in this
book
are tools ? which should be used with the benefit of an understanding of how
both
the ? tool ? ? and the market works . the ? techniques we describe are certainly
not
? magic wands ? which can be waved at ? data and risk management problems to
provide instant and perfect solutions . to quote from the riskmetrics
technical
document ? ? no amount of sophisticated analytics will replace experience and
professional judgement in managing risk . ? . ? however , the right tools ,
correctly
used make the job a lot ? easier !