The aim of the course is to make the students familiar with the most popular models for energy commodities markets and with the most common methods adopted to price energy derivatives.

1. General features of commodity markets and, in particular, energy markets: oil, gas, power; some basic empirical results.
2. The most popular models proposed for energy markets: Lucia and Schwarz, Cartea and Figueroa, Benth, Cartea, Meyer-Brandis, Roncoroni-Geman.
3. Some mathematical tools: a brief introduction to Levy processes and additive processes: the Levy-Ito and the Levy-Kintchine representation theorems. Measure changes; the Esscher transform for Levy and additive processes.
4. Forward and European Options valuation in energy markets: some closed-form solutions for relevant models.
5. Forward curve modelling: the Heath-Jarrow-Morton description of forward curves dynamics in energy markets.
6. An introduction to weather derivatives and their valuation: temperature dynamics models, CAT contracts, HDD and CDD.

Course Dates:
Monday, November 3, 2014 – Friday, November 14, 2014
(room reservations can still change)

The examination will consist of a small project and an oral discussion on that.

• F.E. Benth, S.J. Benth, Stochastic Modeling of Electricity and Related Markets, World Scientific (2008).
• H. Geman, Commodities and Commodity Derivatives, John Wiley (2005).
• F. E. Benth, P. Laurence, V. Kholodny, Quantitative Energy Finance, Springer (2013).

Basic notions on stochastic processes and on option pricing: the Brownian motion and its properties, the Black-Scholes model. The Ito integral and its properties.  Definitions of the most common traded derivatives in the financial markets: Forward contracts, Futures, European options.