To get the benefits of a risk analysis tool, managers and regulators must have a basic understanding of its analytic foundations. Users also must know how design choices affect results.

Key elements of electric or gas price risk management modeling:

  • Typical price distribution: lognormal
  • Term structure of volatility: the two-factor model
    • Mean reversion
    • Seasonality
  • Simulating forward curve dynamics: Monte Carlo
  • Calculating future option premiums
  • Calculating and summarizing total cost distributions
  • Assessing cash and credit risk to the utility

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