Applied risk management series: modelling spreads in energy markets
The modelling of energy spreads, surprisingly, is one of the most overlooked areas in energy finance. Carlos Blanco, Michael Pierce and José Ramón Aragonés explore the most widely used one-factor and two-factor spread models for derivatives valuation and risk management
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.
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