Modeling, Pricing, and Risk Management of Assets and Derivatives in Energy and Shipping


Professor of Mechanical Engineering, Massachusetts Institute of Technology

Abstract: Derivatives are financial contingent claims designed for the pricing, transfer, and management of risk embedded in underlying securities in the fixed income, equity, and foreign exchange markets. Their rapid growth spurred their introduction to the energy commodity and shipping markets where the underlying assets are real commodities, crude oil, refined products, natural gas, electricity, and shipping tonnage. Risk-neutral pricing and stochastic models developed for financial derivatives have been extended to energy derivatives for the modeling of correlated commodity and shipping forward curves and for the pricing of their contingent claims. This has enabled the valuation and risk management of a wide range of assets and derivatives in the energy and shipping markets. They include storage for natural gas, floating storage of crude oil, products and liquefied natural gas in tankers, refineries, power plants and utility scale wind farms, shipping structured securities, cargo vessels, and shipping derivatives portfolios.

Investmentsin energy and shipping assets are exposed to interest rate, commodity price, and freight rate risks. The management of these risks has led to the introduction and widespread use of derivatives, which have experienced explosive growth over the past several ...

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