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2-Factors HJM Estimation and Hedging For Oil and Gas
2-Factors HJM Estimation and Hedging For Oil and Gas
2-Factors HJM Estimation and Hedging For Oil and Gas
Master 203 - M2
Cross-Cutting Project
Outline I
2 Theoretical Framework
3 Estimation of parameters
In a Nutshell
Remember This
Hedging
Investors want to reduce their risk by buying some quantity forward
Risk-reward
For a given level a risk, one wants to know the level of
performance he can get
Optimal strategy
From todays futures price curves, one would choose the optimal
quantity to buy through forward contracts for each commodity he
is selling.
Cross-Cutting Project
Theoretical Framework
One needs to deal with and build the correlated Brownian motions
so as to simulate the dierent futures curve and spot prices. If we
draw a matrix of four independent standard normal variables Y , we
will obtain correlated variables by using:
1
Ycorr = 2 Y
Cross-Cutting Project
Theoretical Framework
1 (ai +aj )
cai +aj , = (e 1)
(ai + aj )
Cross-Cutting Project
Theoretical Framework
Figure: Gas
Oil spot simulations
Cross-Cutting Project
Theoretical Framework
Estimation of parameters
Estimation of parameters
dFi (t, T ) l
l dWt
Fi (t, T )
Where:
m
1 X L
L = z ti
m
i=1
Cross-Cutting Project
Estimation of parameters
Estimation of parameters
dFi (t, T ) s
l dWt
Fi (t, T )
Where:
m
1 X s
s = z ti
m
i=1
Cross-Cutting Project
Estimation of parameters
Estimation of parameters
= (a, s, l , )
Cross-Cutting Project
Estimation of parameters
zt = Ht xt , t 2 t1 , ..., tm
And:
1
=
1
Cross-Cutting Project
Estimation of parameters
xt = (HtT Ht ) 1
HtT zt
Cross-Cutting Project
Estimation of parameters
CF = V i Si + Qi (F (t0 , T , i ) ST )
i=1 i=1 T =Ti
Cross-Cutting Project
Hedging - Risk Reward Curve
12
X TX
i +i
12
X TX
i +i
Where:
F gaz (t0 , T )
i =
F oil (t0 , T )
Cross-Cutting Project
Hedging - Risk Reward Curve
max(Stgaz oil
T St , 0) + oil
T St
Stgaz
We can study the dynamics of Yt = Stoil
:
F (t,T )gaz
At t = T , Y (t, T ) becomes F (t,T )oil
After multi-dimensional Ito, we get: