Masters Programs Course Syllabus

Transcription

1 2 nd Semester, 2 nd Half (4 th Quarter) Energy Finance INSTRUCTOR: João Pedro Pereira CONTACT: joao.pereira@novasbe.pt; phone ; office OFFICE HOURS: Thu, 15h-16h, or by appointment SHORT BIO: João Pedro Pereira is an assistant professor of finance. He has a Ph.D. in Finance from the University of North Carolina at Chapel Hill. From 2004 until 2013 he was an assistant professor at ISCTE-IUL, where he taught in the undergraduate, master, and PhD programs. He held visiting research positions at the University of Delaware and Banco de Portugal. His work has focused on asset pricing, credit risk, and energy markets. 1. COURSE DESCRIPTION AND CONTENT Energy finance is different from traditional finance because of the physical specificities of the underlying markets and products. Hence, we will start by studying the physical properties of energy commodities. Then, we will study how to manage risk in the energy business through the use of financial derivatives. The course structure is based on the GARP Energy Risk Professional curriculum, though with different emphasis on some of the topics. 2. LEARNING GOALS A. Knowledge and Understanding a. Understand the physical characteristics of the main energy commodities b. Understand how the physical properties impact the financial market for each commodity B. Subject-Specific Skills a. Understand the price formation mechanisms for crude oil, natural gas, coal, and electricity b. Use financial derivatives to speculate or manage risk in energy commodities C. General Skills a. Improve analytical thinking b. Use IT tools available to managers c. Financial theories and markets

2 3. COURSE STRUCTURE The following contents are tentative and may need to be updated as we go through the course. Any changes will be communicated clearly. The main readings are indicated for each topic. Class Topic 1 1. Energy basic concepts, definitions, and units - Mackay (2008), chapter Hydrocarbon resources 2.1. Crude oil markets - Edwards (2010), ch Natural gas markets - Edwards (2010), ch 2.1, 5.1, 5.2, Coal markets - Edwards (2010), ch Electricity markets - Edwards (2010), ch 2.4 and Energy Futures 4.1. Review of basic notions of futures and forwards 5 - Hull (2012), ch 1, 2, 3, Main energy futures markets and contracts 4.3. Hedging and speculation with energy futures - Errera and Brown (2002), ch 3, 4, Energy Swaps 5.1. Review of basic notions of swaps - Hull (2012), ch Hedging and speculation with energy swaps - Kaminski, (2004), ch Energy Options 6.1. Review of basic notions of options - Hull (2012), ch 9, 10, Options on Futures - Hull (2012), ch Main energy options markets and contracts 6.4. Hedging and speculation with energy options - Errera and Brown (2002), ch 7 - Edwards (2010), ch Kaminski, (2004), ch 2 10 [Class presentations by students] 11 [Class presentations by students] 12 Review / Catch up or Guest Speaker

3 4. TEACHING AND LEARNING METHODS The course will follow a standard lecture mode. There will be some homework assignments and group projects. 5. ASSESSMENT The final grade is computed as follows: Final exam (mandatory): 50% o The exam is closed-book and closed-notes. However, you may use a twosided A4 formula sheet and a pocket calculator. Homework problem sets: 10% o There will be a small problem set at the end of each topic. o These should be done individually. Group project with class presentation: 40% o Each group will choose a topic and prepare a small written report and a short class presentation. The details will be discussed in the first class. Class participation: rounding of the final grade. In accordance with the school s norms, there is no procedure for grade improvement after passing a course (no re-sit or second course enrolment). 6. TOPICS FOR CLASS PROJECTS Below are some suggestions for class projects with a brief list of what you may want to discuss. Some of the projects partially overlap with what we will do in class, so in these cases I expect you to do a more detailed analysis, perhaps going in depth into a couple of issues of your choice. Other projects are about topics that we will not cover in class, so here you may do a more broad analysis. 1. Oil price trends. a. Describe the main price benchmarks. b. How has the price been evolving recently? Why? c. What to expect for the near future? 2. European Natural Gas markets. a. Major producers, consumers, and physical network b. Physical prices and main types of contracts. c. Price trends. d. Financial derivatives.

4 3. Global coal markets a. Major producers, consumers, and flows b. Physical prices c. Price trends 4. European electricity markets a. Describe the main physical and financial markets. You may choose a particular market or do a broad analysis of the whole European Union. b. Compare prices and justify differences (what is the marginal generator in each market) c. How competitive is each market? d. How are renewables changing the price patterns? 5. Economics of renewable energy a. Pick a renewable technology (e.g., solar PV) b. Do a brief technical description of how it works c. How much does it cost? d. Is it competitive with today s electricity prices? 6. Investment strategies in energy commodities a. Define an investment strategy in either a physical product or in financial futures b. Compute returns and risk metrics c. How does it compare with other traditional investments, such as bonds or stocks? 7. Emissions markets a. Focus on a specific market, like the EU Emissions Trading System or the California Cap-and-Trade Program. b. What is the goal of a cap-and-trade program? c. Describe how the market is organized, what is traded and how d. Price trends e. (Advanced optional topic: discuss the advantages/disadvantages versus other schemes to reduce emissions, like a direct tax on CO2 emissions) 8. Risk management in a given energy company. (Note: this is a more demanding project, but the payoff is also potentially higher) a. Pick a specific company in the energy industry. b. Investigate how they hedge their energy inputs and outputs (focus on energy, not on interest rates, credit risk, or other common risks). i. What contracts do they use? ii. What share of the production is hedged? iii. If this information is not publicly available, you may want to try to reach the Chief Risk Officer (or similar). They may respond to a short survey or they may agree to a brief skype meeting or similar. c. Discuss the hedging strategy of the company (relate to the general theoretical motivations for hedging).

5 9. (You may propose additional topics of your liking) Deadlines: By the 3 rd class: list of group members and chosen topic. By the 6 th class: 1-page summary with the structure of the report, itemizing the topics that you will cover. o At this point you should already have done a substantial part of the work and have a solid idea of how the final report will look like. o The point of this midterm assessment is for us to discuss any potential improvements that you could do until the final delivery. By the 9 th class: delivery of the final written report. o This is the set of slides that you will use in your class presentation. o Maximum number of slides: 15 On the 10 th and 11 th class: class presentations. o Groups will be randomly assigned to one of these presentation days. o Maximum presentation time: 15 minutes 7. BIBLIOGRAPHY AND OTHER RESOURCES A set of handouts will be distributed in class. Details on the books referred above: 1. Edwards, Energy trading and investing. McGraw-Hill. 2. Hull, Options, futures, and other derivatives, 8th ed. Prentice Hall. 3. Errera and Brown, Fundamentals of Trading Energy Futures and Options. PennWell. 4. Kaminski, Managing Energy Price Risk. Risk Books. 5. Mackay, Sustainable energy without the hot air. Available online. Auxiliary resources: 1. FERC, Energy Primer A Handbook of Energy Market Basics. Available online.