1. Book Review: ‘Energy Derivatives: Pricing and Risk Management’ by Clewlow and Strickland, 2000 Anatoliy Swishchuk Math & Comp Lab Dept of Math & Stat, U of C ‘Lunch at the Lab’ Talk November 7 th, 2006

2. About the Authors: Clewlow, Les

3. About the Authors: Strickland, Chris

4. About the Authors: Kaminski, Vince

6. About the Authors: Masson, Grant

7. About the Authors: Chahal, Ronnie

8. Contents Preface 11 Chapters References: 125 Index

9. Chapter 1

10. Chapter 2

11. Chapter 3

12. Chapter 3 (cntd)

13. Chapter 4

14. Chapter 5

15. Chapter 6

16. Chapter 7

17. Chapter 8

18. Chapter 8 (cntd)

19. Chapter 9

20. Chapter 10

21. Chapter 11

22. Chapter 11 (cntd)

23. Chapter 1

24. Ch. 1 (1.1. Intro to Energy Derivatives) A Derivative Security: security whose payoff depends on the value of other more basic variables Deregulation of energy markets: the need for risk management Energy derivatives-one of the fastest growing of all derivatives markets The simplest types of derivatives: forward and futures contracts

25. Ch.1 (Forwards and Futures) A Futures contract: agreement to buy or sell the underlying asset in the spot market (spot asset) at a predetermined time in the future for a certain price, which is agreed today. A Forward contract: agreement to transact on fixed terms at a future date, but these are direct between two parties. F=S exp [(c - y) (T-t)]

26. Ch.1 (Options Contracts) Two types: Call and Put Call Options: gives the holder the right, but not obligation, to buy the spot asset on or before the predetermined date (the maturity date) at a certain price (the strike price), which is agreed today. Differ from forward and futures: payment at the time the contract is entered into (option price)

27. Ch.1 (Options Contracts II)

28. Ch. 1(1.2. Fundamentals of Modelling and Pricing) F. Black, M. Scholes, R. Merton (1973)-BSM approach SDE (GBM)

29. Ch. 1 (1.2. Fundamentals of Modelling and Pricing II) F. Black, M. Scholes, R. Merton (1973)-BSM approach PDE

30. Ch. 1 (1.2. Fundamentals of Modelling and Pricing III) F. Black, M. Scholes, R. Merton (1973)- BSM approach Solution

31. Ch. 1 (1.2. Fundamentals of Modelling and Pricing IV) Merton (1973) P(T,t)-price at time t of a pure discount bond with maturity date T BSM formula

32. Ch. 1 (1.3. Numerical Techniques) Trinomial Tree Method (this book) Monte Carlo Simulation (this book) Finite difference schemes (another one) Numerical integration (-//-) Finite element methods (-//-)

33. Ch. 1 (1.3.1. The Trinomial Method) Alternative to binomial model by Cox, Ross, Rubinstein (1979): continuous-time limit is the GBM Provide a better approximation to a continuous price process Easier to work with (more regular grid and more flexible)

34. Ch. 1 (1.3.1. The Trinomial Method II)

35. Ch. 1 (1.3.1. The Trinomial Method III)

36. Ch. 1 (1.3.1. The Trinomial Method IV)

37. Ch. 1 (1.3.1. The Trinomial Method V)

38. Ch. 1 (1.3.1. The Trinomial Method VI)

39. Ch. 1 (1.3.1. The Trinomial Method VII)

40. Ch. 1 (1.3.1. The Trinomial Method VIII) (The value of option)

41. Ch. 1 (1.3.1. The Trinomial Method IX) (‘backward induction’)

42. Ch. 1 (1.3.1. The Trinomial Method X) (The value of option)

43. Monte Carlo Simulation (MCS) MCS: estimation of the expectation of the discounted payoff of an option by computing the average of a large number of discounted payoff computed via simulation Felim Boyle (UW, 1977)-first applied MCS to the pricing of financial instruments

44. Monte Carlo Simulation (MCS) II

45. Monte Carlo Simulation (MCS) III

46. Monte Carlo Simulation (MCS): Criticisms The speed with which derivative values can be evaluated (treatment: variance reduction technique) Inability to handle American options (treatment: combination of tree and simulation)

47. Summary

48. The End Thank You for Your Attention!

49. Next Talk: Chapter 2: Understanding and Analysing Spot Prices Speaker: Ouyang, Yuyuan (Lance) November 17, 2006, 12:00pm, MS 543

50. Distribution list of Chapters: Ch 1,3,6-Anatoliy Ch 2,7-Lance Ch 4,8-Matt Ch 5,9-Matthew Ch 10-Xu Ch 11-Greg