ABSTRACT
This chapter discusses the key characteristics of energy price series and set the scene with regard to the risk implied by price movements. As most commodities, energy prices tend to be highly volatile, especially in comparison to other asset classes such as equities and bonds. Prices for a commodity between markets and across time may occasionally be out of balance. Arbitrageurs are those who seek such imbalances and act quickly to take advantage of such mispricing opportunities in order to make riskless profits. A cross-commodity spread involves the sale a purchase of two contracts for different but related commodities, usually for the same delivery month. A typical cross-commodity spread in energy is that for two different crudes, also known as an inter-crude spread. There are several types of participants in the energy derivative markets. They may be producers and consumers of the various types of fuels and energy, as well as transformers and traders.
