Energy Price Risk: Trading and Price Risk Management by T. James

By T. James

Strength fee probability was once encouraged via the good fortune of the classes Tom James has been operating in worldwide strength and commodities buying and selling and cost chance administration. it's the practitioner's consultant to optimizing corporation functionality utilizing the proper cost threat ideas and instruments. according to the author's vast event within the commodity derivatives undefined, it comprehensively covers the complete spectrum of the power complicated, together with crude oil, petroleum items, usual gasoline, LPG/LNG and electrical energy. utilizing many labored examples, this e-book bargains sensible insights and suggestions.

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Additional resources for Energy Price Risk: Trading and Price Risk Management

Sample text

Initial margin The good faith collateral placed with the clearing house for futures exchange or OTC contracts. Initial margin is paid on the opening of a new derivative position. The clearing house sets the level of initial margin required on each derivatives contract based on current market circumstance, including price volatility. The initial margin is returned once the derivative position has been closed out either through expiry or by the user trading out of the contract by trading an opposite position.

For example, when Enron had its credit rating downgraded this triggered a ‘credit event’ in some of its derivatives trades and it was forced to place collateral with some of its counterparts, creating a huge cash flow crunch and in turn triggering its downfall. It can also mean, in terms of the market place, an extreme event that triggers rapid price movement in the energy markets. Exchange This is usually a regulated trading centre that offers standard contracts and requires the use of their clearing house and margining of trades.

EXCHANGE OF FUTURES FOR PHYSICALS (EFP) 37 In futures markets, hedging involves taking a futures position opposite to that of a cash market position. That is, a corn farming cooperative would sell corn futures against its crop, an importer of Japanese cars would buy yen futures against its yen liability, a precious metals merchant would purchase gold futures against a fixed-price gold sales contract and an energy producer or consumer might look at buying or selling energy futures against their price risk exposure in anticipation of a market price increase/decrease.

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