Energy Price Risk: Trading and Price Risk Management by T. James

By T. James

Strength cost danger was once encouraged via the good fortune of the classes Tom James has been working in international strength and commodities buying and selling and value possibility administration. it's the practitioner's consultant to optimizing corporation functionality utilizing the right kind cost danger options and instruments. according to the author's vast adventure within the commodity derivatives undefined, it comprehensively covers the total spectrum of the power complicated, together with crude oil, petroleum items, average gasoline, LPG/LNG and electrical energy. utilizing many labored examples, this publication deals sensible insights and strategies.

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Example text

There are two types of options – call options and put options. A call option on a futures contract gives the buyer the right, but not the obligation, to purchase the underlying contract at a specified price (the strike or exercise price) during the life of the option. A futures put option gives the buyer the right, but not the obligation, to sell the underlying contract at the strike or exercise price before the option expires. The cost of obtaining this right to buy or sell is known as the option’s ‘premium’.

An EFP market is normally quoted amongst futures brokers, so this is the first point of call for any organisation looking to find some counterpart to an EFP transaction. Example: Using an EFP to initiate a position On 15 December, an oil refiner who wishes to protect a portion of his oil products inventory wishes to sell futures to protect against falling prices. 42 ENERGY PRICE RISK At the same time, a Gasoil oil distributor is concerned about rising prices and looks to buy to protect his forward purchases.

Information to be supplied can include: ■ ■ ■ ■ ■ ■ The fact that an EFP transaction is being effected. A statement that the EFP has resulted in a change in ownership of a particular energy commodity. The date the transaction occurred. The type and quantity of the energy futures involved in the EFP transaction. The price at which the futures transaction is to be cleared. The names of the clearing broker members involved in the EFP. The buyer’s and seller’s clearing members must satisfy the Exchange that the transaction is a legitimate EFP.

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