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White Papers & Articles

White Papers

The risks and rewards of LNG

The analytical challenges of operating in the LNG market are complex.  There are potentially very large risks and rewards to companies operating in this space, and ‘getting the numbers right’ is often critical to the success and viability of these businesses.

Build vs Buy

In this latest paper in our Business Briefing Series, we tackle the age old debate about whether an organisation should use their existing resources to "do it themselves". Lacima weighs in with some observations on five of the key myths and their realities.

The power of cashflow based risk metrics

If the focus of senior management is on current and forecasted gross margins, revenues, earnings, cashflow, or profits, then these should form the basis of the "at risk" measure rather than the more short-term, market value based, Value-at-Risk (VaR) metric. Adopting a cashflow based "at risk" measure will give greater insight into the business operations, enhance profitability and give insight into the effectiveness of hedging programs.

How relevant is VaR for energy markets

Despite its many limitations, Value-at-Risk is still the most commonly used risk profile measuring tool in the energy industry. This business briefing paper discusses why the energy industry’s love affair with VaR could be dangerous. Subsequent business briefings will look at the alternatives.

Where is the RM in ETRM?

Energy organisations are increasingly challenged to establish rigorous and disciplined processes to identify, measure and report risks and to ensure that they are utilising relevant market and credit risks metrics. This business briefing discusses why most people find that the majority of ETRM systems alone are not sufficient to address the comprehensive risk and valuation needs of an energy organisation, the obstacles faced in attempting to overcome these deficiencies internally, and proposes alternative approaches for consideration.

How to avoid lost gas swing value and hidden portfolio risk

Increased liquidity and competition in European gas markets has resulted in the ability to take advantage of the flexibility and constraints in long term agreements. With optimisation techniques improving, it is becoming easier to maximise the value derived from these agreements. In this paper, Lacima discusses the importance of accurately valuing the complex terms in a gas swing contract to achieve maximum value, and how this impacts the whole portfolio and hedging decisions.

How to value thermal generation assets to maximise profits

Learn how to treat generation assets as real options, evaluate different valuation methods, measure the risk of portfolios with physical assets and financial hedge contracts, incorporate optimal dispatch strategies and more.

Why risk quantification is essential for energy portfolios

How can I take advantage of energy market uncertainties? How does risk quantification create value for my company? Learn about the range of risk factors to consider and the methods of quantification.

Articles

Valuing generation assets: overview and spark spread option valuation

Learn about different ways to value the flexibility of generation assets as real options whilst taking into account the constraints in operating the plant.

Gas storage: spot optimisation

We describe a spot trading strategy which maximises the total expected cash flow from the storage facility using a trinomial tree based optimisation model.

Gas storage: rolling intrinsic valuation

We describe a storage valuation method known as the rolling intrinsic strategy, which extends the intrinsic strategy by allowing for regular re-optimisation and rebalancing of the portfolio.

Gas Storage: overview and static valuation

We provide an illustration of how the four most common valuation methodologies are used in practice with practical examples illustrating their implementation.

Implied trees: valuing exotic options

In this article we calibrate the tree to the market prices of fixed strike Asian options and then show how to price floating strike Asian options as our example of an alternative derivative.

Calibrating trees to the market price of options

We outline an approach for calibrating a local volatility surface single factor model to market prices of average price (Asian) options.

Application of multi-factor multi-commodity model for cargo dispatch optimisation

We describe the use of the multi-factor multi-commodity model in determining the optimal location for shipping a cargo, specifically the delivery of LNG.

Multi-factor multi-commodity models & parameter estimation processes

We discuss a general multi factor multi commodity model and the process for estimating parameters from historical data.

Risks and hedging techniques for swing contracts

In this article, we discuss risks & hedging techniques for swing contacts with take-or-pay, make-up & carry-forward features

Measuring and capturing value in the flexibility of gas swing contracts

Learn about the techniques to capture the value in the flexibility of gas swing contracts that permit realistic incorporation into at-risk calculations.

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