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2014/2015  KAN-COECV3003U  Energy Finance: Price Modeling and Market Characteristics

English Title
Energy Finance: Price Modeling and Market Characteristics

Course information

Language English
Course ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Semester
Course period Autumn
Timetable Course schedule will be posted at calendar.cbs.dk
Max. participants 50
Study board
Study Board for MSc in Advanced Economics and Finance
Course coordinator
  • Nina Lange - Department of Finance (FI)
Administration: Ida Lyngby - il.eco@cbs.dk
Main academic disciplines
  • Finance
Last updated on 08-04-2014
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
Course prerequisites
1. Please note that 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 MSc in Advanced Economics and Finance (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 than 13 May 2014. Also remember to sign up for the course through the online registration.
Prerequisites for registering for the exam
Number of mandatory activities: 1
Compulsory assignments (assessed approved/not approved)
Oral assignment in groups of no more than 3 students: In the end of the semester, all students must analyze and orally present a case analysis done in the last period of the course.

In case the oral assignment is not approved, the student will be given the possibility to make a new oral presentation before the ordinary exam. The exact date of this re-presentation will be announced in e-campus during the last week of the course.
Oral exam:
Exam ECTS 7,5
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 second internal 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 stick), 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.

Slides are allowed for the first part of the examination.

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
- Class lectures
- Case study
- Exercises
Further Information
Changes in course schedule may occur
Tuesday 08.00-09.40, week 36-41
Thursday 08.00-09.40, week 36-41, 43-48
Expected literature
  • Barlow: `'A Diffusion Model for Electricity Prices," Mathematical Finance, Vol. 12, No. 4, 2002, pp. 287-298.
  • Bendt, Bendt, and Koekebakker: Stochastic Modeling of Electricity and Related Markets, World Scientific Publishing Company, 2008, pp. 1-17.
  • Bertus, Godbey and Hilliard: \Minimum Variance Cross Hedging Under Mean-Reverting Spreads, Stochastic Convenience Yields, and Jumps: Application to the Airline Industry", The Journal of Futures Markets, 2009.
  • Carmona and Coulon: A survey of commodity markets and structural models for electricity prices," Quantitative Energy Finance, 2014, pp. 41-83.
  • Erb, Luthi, and Otziger: Schwartz (1997) Two-Factor Model: technical note,", 2010.
  • Geman: Commodities and Commodity Derivatives, Wiley, 2005, pp. 201-217 and 236-249.
  • Gibson and Schwartz: \Stochastic convenience Yield and the Pricing of Oil Contingent Claims", The Journal of Finance, Vol. 45, No. 3, 1990, pp. 959-976.
  • Lucia and Schwartz: Electricity Prices and Power Derivatives : Evidence from the Nordic Power Exchange," Review of Derivatives Research, Vol. 5, 2002, pp. 5-50.
  • Miltersen: Commodity price modelling that matches current observables: a new approach, "Quantitative Finance, Vol. 3, No. 1, 2003, pp. 51-58.
  • Miltersen and Schwartz: Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Vol. 33, No. 1, 1998, pp. 33-59.
  • Oum and Oren: Hedging Quantity Risks with Standard Power Options in a Competitive Wholesale Electricity Market", Naval Research Logistics, Vol. 53, 2006, pp. 697-712.
  • Schwartz: \The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," The Journal of Finance, Vol. 52, No. 3, 1997, pp. 923-973.
  • Schwartz and Smith: \Short-term variations and long-term dynamics in commodity prices, "Management Science, Vol. 46, No. 7, pp. 893-911.
  • Sørensen: Modeling Seasonality in Agricultural Commodity Futures," Journal of Futures Markets, Vol. 22, No. 5, 2002, pp. 393{426.

  • The case material
  • Teaching notes, presentations and exercises
  • Mathematical Methods and Models in Finance. Lecture notes.
Last updated on 08-04-2014