Risk management of energy derivatives: hedging and margin requirements

Sumawong, Anannit (2014) Risk management of energy derivatives: hedging and margin requirements. Doctoral thesis (PhD), University of Sussex.

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Abstract

The recent growth of exchanges has generated large trading platforms for investors. The largest of these institutions, the Intercontinental Exchange and the Chicago Mercantile
Exchange group are now responsible for clearing trades for the majority of investors worldwide and are perhaps, as large commercial banks are, too big to fail. This has attracted attention from international regulating bodies to impose strict risk management standards on the exchanges to ensure financial stability. In this thesis, we identify first, that an investor in the market is strongly affected by margins set by the exchanges in determining the transaction costs of a trade. We discuss the possibility that a volatile margin movement would introduce further risks for such an investor causing them to raise more capital to cover possible margin calls which can perhaps lead to procyclicality. We follow this work by addressing how margins can be determined in adherence to the new laws. Exchanges are now required to set margins based on the Value-at-Risk, hence we search for the best Value-at-Risk method for margining use. Here, we find that the simple Orthogonal Exponentially Weighted Moving Average method is sufficient in forecasting the Value-at-Risk, which contradicts a fair body of the literature who suggests that complex developments of GARCH are superior. We then offer methods for setting and evaluating margin requirements upon the Value-at-Risk estimates, concentrating on producing stable margin requirements. The automated methods produced in our work outperform all other methods available in the literature. Furthermore, we are the first to provide methods for assessing margin stability. Our work is timely in addressing the current affairs of the world economy and is among the first to tackle the margin stability issue in detail.

Item Type: Thesis (Doctoral)
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance > HG3810 Foreign exchange. International finance. International monetary system
Depositing User: Library Cataloguing
Date Deposited: 11 May 2015 05:46
Last Modified: 28 Sep 2015 14:06
URI: http://sro.sussex.ac.uk/id/eprint/53818

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