Spark Spreads and Multi-Fuel Hedging & Structuring
CPE Credits: Marketing 2, Management Advisory Services 2, Economics 1, Production 6, Specialized Knowledge & Applications 5. Total =16.
Day 1
 
Energy Trading & Hedging Overview

Indexation and Financially Settled Energy Contracts

• Identifying exposure to price and spread risks
• Indifference between physical energy and index cash flow
• Energy swaps and financially settled hedges
• Managing Basis

Energy Options

• Broad concept of optionality for energy
• Hedging energy risk with puts and calls
• Volatility and option pricing

Multiple Fuel Structuring

Cross-Commodity Structures

• Basis swap to cross-commodity swap
• Volumetric adjustments
• Physical for physical swaps
• Financial for financial swaps
• Physical for financial contracts
• Dark spread swaps

Embedding Multi-Fuel Swaps in Physical Supply Contracts

• Expanding hedging possibilities
• Pricing power indexed to aluminum prices
• Pricing natural gas indexed to gasoline
• Advantages of embedding
• Locking in competitive pricing against competing fuels

Managing Value at Risk/Earnings at Risk with Multi-Fuel Structures

• Component parameters in standard risk metrics
• How VaR/EaR changes after the multi-fuel hedge
• Effect of multiple fuel swaps on the gross exposure size
• Effect of multiple fuel swaps on the assumed volatility
• Fine tuning VaR/EaR with volumetric adjustments

Structuring Option Hedges with Multiple Commodities

• Inter-seasonal collars
• The multiple-fuel costless collar

Multi-Fuel Options

Complex Optionality

• Beyond Black-Scholes
• How exotic options avoid “over-hedging”
• Path dependent options
• Monte Carlo approach to pricing single commodity options
• Pricing exotic options using Monte Carlo simulation methods

Multiple-Fuel [Exotic] Option Structures & Pricing

• Basket Options
• Spread options
• Rainbow/chooser options
• Rainbow options embedded in energy operations
• The role of correlation in valuing multiple fuel options
• Using Monte Carlo methods to determining multi fuel option premium
• Cross commodity barrier options
• Options that pay out in a second commodity
Day 2

Spark Spread Structuring & Hedging

Heat Rates & Spark Spread Structuring

• Trading natural gas against electricity
• Conversion factors for thermal efficiency
• Understanding heat rates and thermal efficiency
• Spark spreads and the effect of heat rates
• Structuring and pricing spark spread swaps

Embedding Spark Spread Swaps

• Pricing natural gas indexed to power for a generator
• Effective hedge of generating margins
• Producer sells natural gas indexed to power
• Pricing power indexed to natural gas
• Guaranteeing the competitive position of natural gas vs. power

Trading and Structuring Spark Spreads Transactions

• Hedging generators’ spark spread margins with a swap
• Pricing spark spread swaps
• Heat rate implications on spark spread pricing

Physical and Financial Exchanges of Gas and Power

• Direct and reverse tolling
• Synthetic generation
• Synthetic tolling using swaps

Market Implied Heat Rates

• The decision to generate or shut down
• Evaluating the economics of generating alternatives

Tolling Using Generating Capacity

• Sample tolling agreement
• Tolling economics
• Tolling as a source of regulatory capacity
• Extrinsic value

Optionality in Generation and Heat Rate Options


Optionality in Generation

• Real options
• Generating capacity as a long spark spread position
• Generating capacity as optionality
• Identifying the option embedded in generation
• Long the spark spread + a put option on the spark spread

Monetizing Embedded Options in Generation

• Selling puts on the spark spread
• Selling calls on the spark spread
• Dispatch options

Heat Rate Options

• Heat rate call as the right to buy power at a strike heat rate
• Heat rate options as a means to increasing regulatory capacity requirements
• Role of correlation in valuing heat rate options
• Revenue stabilization and enhancement strategies for generators

Spark Spread Option Valuation of Generating Assets

• Generator as an option strip
• Real Options valuation approach vs. traditional DCF






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