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2013/2014  KAN-OECON_OE37  Energy Finance: Price Modeling and Market Characteristics

English Title
Energy Finance: Price Modeling and Market Characteristics

Course information
Language English
Exam ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Semester
Course period Autumn
Changes in course schedule may occur
Friday 08.00-10.35, week 36-41, 43-48
Time Table Please see course schedule at e-Campus
Max. participants 50
Study board
Study Board for MSc in Advanced Economics and Finance
Course coordinator
  • Kristian Miltersen - Department of Finance (FI)
  • Nina Lange - Department of Finance (FI)
Administration: Ida Lyngby - il.eco@cbs.dk
Main academic disciplines
  • Finance
Last updated on 18-03-2013
Learning objectives
Upon the end of the course the students will be able to:
  • Model asset prices in continuous time using stochastic processes
  • Model commodity markets including the concept of convenience yield and their relations to forward and futures markets
  • Explain and differentiate the contract types in energy markets, e.g., options on forwards, Asian style derivatives, spread options
  • Explain the special features of energy markets and their courses and consequences – non-constant volatility, option smiles, spikes/jumps and seasonality – in the above mentioned models
  • Price derivatives including flow features in the above mentioned models
  • Hedge energy exposures including proxy hedging techniques
  • Explain no-arbitrage bounds on prices due to cross product substitution and their courses and consequences
Course prerequisites
1. This course is taught at an elite level and requires a high level of mathematics and probability theory. More specifically, it requires Derivatives and Risk Management from the cand.oecon program or similar curriculum. Knowledge of econometrics is an advantage.

2. Send in a 1 page motivated application, a 1 page CV, and a graduate grade transcript. Send this to: oecon.eco@cbs.dk no later than14 May 2013. Also remember to sign up for the course through the online registration.
Prerequisites for registering for the exam
Compulsory assignments (assessed approved/not approved)
Written assignment. In the end of the semester, all students must hand in a written 2-3 page summary covering a case analysis done in a two-week period. The paper shall provide an executive summary of the case study done. The mandatory case analysis and case presentation will take place in groups of no more than 4 students, however the written executive summary is individual and counts toward a final grade together with the oral examination.
Examination
Oral exam:
Examination form Oral Exam
Individual or group exam Individual
Duration 20 min. per student, including examiners' discussion of grade, and informing plus explaining the grade
Preparation time No preparation
Grading scale 7-step scale
Examiner(s) Internal examiner and external examiner
Exam period Winter Term and December/January, Provisional: The exam is held in December. The re-take is held in January.
Aids allowed to bring to the exam Closed Book
Make-up exam/re-exam
Same examination form as the ordinary exam
Description of the exam procedure
Oral examination, 20 minutes, no preparation time. Prepared slide show is a part of the examination. The examination has two parts 1) (10 minutes) Three weeks before the exam, the students are given a number of topics for which they have to prepare a 10 minutes presentation. They should use slides (brought to the exam on a USB drive or the like), but they are not allowed to bring other exam aids for the exam. At the start of the examination, the student chooses one of the topics at random and immediately thereafter gives the presentation. 2) (8 minutes) The student is asked questions in parts of the curriculum different from the topic covered in the part.
Course content and structure

The course provides the students with a profound knowledge of key concepts, relations, and models in commodity markets in general and energy markets in particular.

The concepts learnt in Derivatives and Risk Management are extended to model commodity markets.  The course is devoted to understanding commodity markets and corresponding derivatives markets. We emphasize the concept of convenience yields and its relations to forwards and futures markets of commodities. The course focuses on energy markets in particular. Energy markets are challenging due to the number of cross product substitutions, the various competitive settings in the sector, the institutional details of the distribution channels of the different products, the different market structures, and the highly sophisticated derivatives markets. In particular, energy prices experience seasonality, mean reversion, spikes/jumps, non-constant volatility and the physical character of the products creates many different markets with lower liquidity comparing to other financial markets.
Teaching methods
The format of the course is based on the following elements:
- Class lectures
- Two week case study
- Exercises
Expected literature

- Geman (2003): Commodities and Commodity Derivatives, Wiley
- Bendt, Bendt and Koekebakker (2008): Stochastic Modeling of Electricity and Related Markets, World Scientific Publishing Company.
- Journal articles and working papers
 
Last updated on 18-03-2013