Introduction to Energy Derivatives

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I. Commodity Markets, Price Risk & Exchange-Traded Futures

Key definitions 1-1 Overview of spot, cash & forward markets 1-3 New ways of thinking:  "We're just trading firm promises." /"How to sell something you don't  own" * Derivatives and market center  equilibrium 1-9 The two main types of  derivatives 1-11 Commodity price & margin risk 1-15 Price hedgers & margin hedgers: Two different types of players 1-21 The trading/hedging/marketing  risk spectrum: Where do you want to play? 1-26 Defining commodity forward contracts 1-33 The evolution of commodity forward markets: Precursor to futures 1-34 Commodity futures contracts: Definitions and uses 1-38 Price convergence between  futures contracts & physicals 1-45 Price speculation and price  discovery 1-49 Specifications of the NYMEX  natural gas contract 1-55 Specifications of the NYMEX  electricity contracts 1-56 The four different energy  exchanges: NYMEX, KCBOT , CBOT & MGE 1-60

II. Fundamentals of Hedging & Basis

Hedging with physical forwards vs. financial hedging techniques 1-65 "Long",  "Short" and other terms 1-68 The classic "Buyers" or "Long" futures hedge: Concepts  & mechanics 1-69 The classic  "Sellers" or "Short"  futures hedge: Concepts & mechanics 1-78 Natural gas and electricity  hedging (Workshop Exercises) 1-85 Why perfect hedges don't exist: Real-world complications 1-103 Different definitions of the term: "Basis" 1-106 Basis risk & its impact on futures hedging ("basis blowout" example) 1-115

III. Introduction to Financial Swaps & the OTC Markets

Overview of OTC derivatives  1-118 Fixed-for-floating index swaps: Concepts & diagrams 1-120 "Exchange-Indexed" or "Merc Look-A-Like" swaps * Hedging with fixed-for-floating swaps (workshop exercise) 1-129 OTC dealers &  institutional energy brokers 1-141 How OTC dealers operate 1-145 Two different types of basis swaps 1-146 More about swaps 1-153 Physical basis contracts & "trigger deals 1-158 Swaps versus futures contracts: Pros & cons 1-163

IV. The ABCs of Commodity Options

The concept of optionality & definitions 1-164 Call and Put options 1-165 Different types of option  instruments: exchange-traded, OTC & physical 1-167 Buying versus writing options  1-169 American, European & Asian options 1-172 How NYMEX options trade in the pit 1-173 Intrinsic value, "In-the-money" and other terms 1-177 The time value of an option  and the importance of volatility expectations 1-182 The Black-Scholes option pricing model: What it is and why it doesn't matter 1-183 Creating a price cap hedge with Call options (Workshop Exercise) 1-187 "Caps",  "Floors" and "Collars"  1-191 OTC puts and calls 1-206 OTC daily swing options 1-208