Get Assignment Help Online-Energy and Commodity Finance Project Assignment
requirements: (1500 words)
Energy and Commodity Finance Project Assignment (Spring 2018)
An energy company is considering investing in a new physical asset (choice of assets below), and you must provide the firm with recommendations regarding the valuation of the project, and the risks involved, by using data analysis, modelling and simulation. Each physical asset is a real option project that can be approximated as a string of spread options, and can be hedged using financial derivatives (<link is hidden> futures) available in the market. Your valuation and risk analysis task is split into three parts, of which Parts 1 and 2 are required, and Part 3 is a choice of several tasks. Excel is suggested as software to use (although others possible).
You have several choices to make, leading to a variety of different projects across the class:
<link is hidden> of physical asset: analyse one of the following (max 8 students on each):
Oil refinery (3:2:1 crack spread: 3 bbl. of crude makes 2 of gasoline, 1 heating oil)
<link is hidden> of market / dataset: analyse data from one of the following (max 4 students on each, per asset) or suggest your own dataset and check with me if you’d prefer:
Crude oil: WTI (US) or Brent (Europe) or Dubai (Middle East)
III. Choice of final task: see options in Part 3 below (max 4 students on each, per asset)
Part 1 – Market Analysis and Model Selection:
<link is hidden> data as needed and analyse the historical price dynamics of your chosen markets (including spot and forward) and describe the key features of the data, <link is hidden> price trends, seasonality, forward volatility and correlation structure.
<link is hidden> (<link is hidden> news articles) the current state of these markets and discuss briefly the fundamental factors / risks likely to impact them in the coming years.
<link is hidden> an appropriate model(s) for prices dynamics in these markets, including dependence structure between commodities. Estimate parameters, check your fit by simulation, and discuss model strengths and limitations.
Part 2 – Physical Asset Valuation and Hedging:
Assume that the physical asset is available immediately and has a lifetime of five years.
<link is hidden> Monte Carlo simulation with your price model(s) above to estimate the value of the physical asset via a spread option approximation. How does your answer compare with the naïve approach of finding intrinsic value only?
[Notes: use daily or weekly time steps, and sufficient paths to have confidence in the answer. Pick other parameters like size, efficiency or fixed costs sensibly.]
<link is hidden> energy firm is interested in both the asset’s value and how risky the revenue stream is, before and after hedging. Design a static hedging strategy with available futures contracts and investigate by how much the variance of the revenue distribution can be reduced. Comment on any assumptions you make.
<link is hidden> the sensitivity of your results in (i) and (ii) above to some of your key model parameters like volatility, correlation and mean reversion rate.
Part 3 – Choice of Additional Topics:
Choose one of the following additional tasks / topics. Choose based on your own preferences and interests as well as what seems most appropriate for your choice of physical asset (although most could be adapted to all). There is certainly room for creativity and different approaches here. Be sure to justify assumptions you make and discuss model limitations.
<link is hidden> volume or demand risk in a simplified way by assuming demand follows a standard model such as a correlated OU process (capped at physical capacity). Investigate how your Part 2 answers change and how much of an impact the “correlation risk” can have. How else could the firm consider hedging?
<link is hidden> the analysis of Part 2(ii-iii) by incorporating available option contracts into the static hedging strategy. Either obtain market data on options (available in some markets) or generate realistic options prices in your model. How much extra hedging benefit can the options provide and what strategy would you recommend?
<link is hidden> the impact of operational constraints on the valuation by incorporating some form of these in a simplified way (<link is hidden> start-up costs, maximum starts, run time limits, ramp-up rates, decision time lags, etc.). Explain your strategy for building these into the Part 2 simulations in a manageable way, and analyze the sensitivity of results to assumptions. How else could the valuation be improved?
<link is hidden> a current issue or key market factor from your investigations in Part 1(ii) and build it into model or simulation approach in a simplified way, in order to assess its impact on Part 2 results. Explain your approach and discuss the risk (or potential benefit) that the issue may have on the energy firm. How else could the analysis be improved to handle such considerations? What would you recommend to the firm?
GUIDELINES & MARKING CRITERIA:
Both assessments should cover the entire set of topics and questions above (Parts 1-3), although you may choose to focus your presentation more on some parts than others, given time constraints. You are expected to examine in depth each topic and provide recommendations to the energy firm regarding the valuation and risk of the physical asset. Empirical analysis of data is expected, with some data to be provided (spot prices) and other data to be downloaded (<link is hidden> futures prices and anything else needed). You should consider strengths and weaknesses, and evaluate the effectiveness of the price models chosen and the hedging strategies available to the firm, along with any other methodological choices.
For both assessment modes, marks will be based on a number of different criteria:
sufficient coverage of all aspects of the questions posed above
well-structured, clear and appropriate presentation style
appreciation of methodological issues, strengths, challenges and limitations
effective use of data via tables or figures to support arguments
insightful and accurate discussion of results, leading to logical conclusions
overall coherence and structure of presentation
FURTHER CONSIDERATIONS:
While the questions provide clear guidelines for how to focus your discussions, in some cases they are intentionally fairly open, so there is room for innovative ideas on how to improve the analysis to provide further insights, especially in Part 3. Such extensions are opportunities for very high marks if well analysed and presented, but should not be treated as a way of avoiding answering the posed questions. Similarly, including further insights or making creative choices in your analysis based on further research into the energy markets or physical assets in question is certainly welcome but not required.
WRITING WELL AND AVOIDING ACADEMIC MISCONDUCT:
Plagiarism, collusion, and cheating in exams are all forms of academic misconduct which the
University takes very seriously. Every year, some students commit academic misconduct unintentionally because they did not know what was expected of them. The consequences for committing academic misconduct can be severe, so it is important that you familiarize yourself with what it is and how to avoid it.
The University’s S3 guide to study skills gives advice on writing well, including hints and tips on how to avoid making serious mistakes. You will also find helpful guides to referencing properly and improving your critical writing skills. Make use of the resources there. If you are dealing with difficult circumstances, such as illness or bereavement, do not try to rush your work or hand in something which may be in breach of the rules. Instead you should seek confidential advice from the Student Life Centre. The full University rules on academic misconduct are set out in the Examination and Assessment Regulations Handbook.
