Portfolio Risk in the Electricity Markets

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Conventional Role of the Financial Engineer. New Instrument ValuationTake-or-pay, swing alternative, climate subordinates, gas stockpiling,

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Slide 1

Portfolio Risk in the Electricity Markets Rene A. Carmona Bendheim Center for Finance Department of Operations Research & Financial Engineering Princeton University

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Traditional Role of the Financial Engineer New Instrument Valuation Take-or-pay, swing choice, climate subsidiaries, gas stockpiling,… . Plan and investigation of hazard measures VaR, Expected Shortfall, … .. Intelligible measures of hazard Search for ideal supporting procedures VaR supporting, Delta supporting, Delta-Gamma supporting, … . Fragmented markets Stochastic instability, hop dispersions, … .. Dynamic supporting for purchasers and merchants Indifference valuing

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FE for the New Power Markets Credit Rating Free-Fall Could Clearing be a Solution ? Benchmark for Collateral Posting

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Credit Rating Downgrades Modeling illiquidity Understanding credit relocation Including counterparty chance in valuation Hedging with credit subsidiaries

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Could Clearing be a Solution? Requirement for institutionalized instruments Exchange exchanged instruments are institutionalized OTC are not Design of a negligible arrangement of instruments from which most instruments could be combined Industry cherishes tailor made contracts

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Collateral Requirements/Margin Calls Frequent Marks to Market Objective valuation calculations generally acknowledged Netting or not Netting (that is the issue) Challenge of the measurement of conditions Correlations, copulas, … .. Coordinated way to deal with hazard control Distributed enhancement

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Conclusions Think Probabilistically Estimate Properly the Distribution Tails Use the Right Tools to Quantify Dependencies

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Operations Research & Financial Engineering Princeton University Bendheim Center for Finance

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