Experts in energy modeling, consulting and training!

KYOS offers specialized advise on trading and risk management in energy markets. Our expert team has years of experience in quantitative modelling and advisory services in commodity markets. Our sophisticated solutions are developed to support decision making, investment proposals and risk calculations. KYOS has a clear focus on the following areas: Products, Consulting and Training.

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    Course outline

    Outline – day 1

    Session 1: European gas markets, storages and contract structures

    • Overview European gas markets and trading hubs
    • Traditional use of flexibility instruments in a portfolio:
      • Seasonal: summer – winter demand variations
      • Peak shaving
      • Typical injection/release patterns
    • Overview of gas storage assets:
      • Overview of European gas storages
      • Primary parameters: Injection, withdrawal, working gas volume
      • Pricing of storages in the German market
    • Overview of swing / Take-or-Pay contracts
    • Variable contract volume, with Take-or-Pay constraints
    • Annual and other period constraints
    • Indexed strike prices with monthly lagging and averaging
    • Hard and soft penalties for violation of constraints
    • Carry-Forward and Make-Up rights

    Session 2: Storage valuation: Trading forwards in a dynamic hedging strategy

    • Overview valuation approaches to physical and financial storage
    • Understanding the forward curve: interaction between storage costs and forward prices
    • Forward curve building: from a curve of tradable contracts to a smooth daily ‘expected’ curve
    • Understanding intrinsic value:
      • Daily intrinsic, monthly intrinsic or tradable intrinsic
      • Incorporation of liquidity and trading costs
      • Impact of storage constraints
    • Developing a cash-flow valuation model for a storage investment
    • Rolling intrinsic valuation: comparison of different ‘rolling’ strategies
    • A storage as a basket of time-spreads

    Forward curve modeling and simulation

    • Forward curve dynamics:
      • Spot versus forward price dynamics
      • The volatility term structure
      • Elements of a multi-factor model: short-term, long-term and winter-summer spread uncertainties
    • Correlation and co-integration between gas and oil prices
    • Implications for the valuation of gas contracts with indexed strike prices

    Outline – day two   

    Session 3: Option valuation of storage and swing

    Gas price dynamics (focus on spot)

    • Short intro option theory and real options in energy markets
    • Primary price dynamics in natural gas markets
    • Volatility levels and estimation procedures for spot and forward prices
      • Historical versus implied volatility
      • Moving average and Exponentially Moving Average volatility
    • Mean reversion rate: definition and estimation approaches
      • What history to use for mean-reversion and volatility?
      • Seasonal patterns in volatility and mean-reversion

    Option valuation of storage and Take-or-Pay contracts

    • The tree approach for valuation of an American-style option:
      • Setting up the tree consistent with market volatility
      • Backward induction
      • Forward valuation
    • The least-squares Monte Carlo approach for valuation of an American-style option
      • Similarity with tree approach
      • Benefits of simulations
      • Extension of this approach to storage and swing valuation

    Session 4: Practical application of valuation and trading concepts

    • Comparing intrinsic value with rolling intrinsic and full option value
    • Trading strategy assumptions behind the different valuations
      • Impact of market liquidity constraints
      • Impact of uncertainty about volatility and mean-reversion
      • Interpreting the delta hedges
    • Guidelines for setting up a backtest
      • Impact of changing volatility, forward curve shapes and mean-reversion over time
      • Comparing initial values with realized values
      • Comparing ‘optimal’ storage injections/withdrawals with actual operator behavior

    Course leader: Cyriel de Jong