Applied risk management series: modelling spreads in energy markets
Implications for valuation and risk management of spread options
Spread relationships such as production, calendar and geographical spreads are critical drivers of physical market trading strategies and asset-hedging activities. However, despite their crucial role in most energy portfolios, modelling energy spreads for derivatives valuation and risk management purposes is probably one of the most overlooked and under-researched areas of energy finance.
In this article, we first describe the main types of energy spreads, then introduce the most popular
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